Dynamic Deception

48 Pages Posted: 10 Jan 2012 Last revised: 27 Nov 2012

See all articles by Axel Anderson

Axel Anderson

Georgetown University - Department of Economics

Lones Smith

University of Wisconsin at Madison - Department of Economics

Date Written: November 17, 2012

Abstract

We explore dynamic deception, such as arises in finance, war, or politics. Our framework subsumes repeated game reputation models, and also includes unbounded intensity models like insider trading as a limiting special case. Our game also generalizes Aumann and Maschler's 1966 paper on repeated games of incomplete information, allowing noisy action monitoring and impatient players.

We characterize the unique equilibrium of our competitive continuous time game between a resource-constrained informed player and a sequence of rivals who partially observe his action intensity. The intensity bound induces a novel strategic bias and serial mean reversion by the uninformed rivals. Adding to the reputation literature, we compute how long the informed player's informational edge lasts.

We then build on our model in three ways. We formulate informational sleuthing by the uninformed player, discovering that the value of information is concave if the intensity bound is large enough. We then allow the informed player to better conceal his actions at some cost, and find that obfuscation optimally rises in how deceived is the public. Finally, we allow the informed player to exploit an unexpected less noisy monitoring technology; the resulting disinformation exercise suffers from a nonconcavity, and is always boundedly large.

Keywords: Asymmetric Information, Reputation, Repeated Games, Continuous Time Games, Constant Sum

JEL Classification: C73, D82, D83, G14

Suggested Citation

Anderson, Axel and Smith, Lones, Dynamic Deception (November 17, 2012). Available at SSRN: https://ssrn.com/abstract=1982710 or http://dx.doi.org/10.2139/ssrn.1982710

Axel Anderson (Contact Author)

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

Lones Smith

University of Wisconsin at Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706-1393
United States
608-263-3871 (Phone)
608-262-2033 (Fax)

HOME PAGE: http://www.lonessmith.com

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