Allowing others to learn: Essays on Bayesian updating in environments of asymmetric information

Allowing Others to Learn: Essays on Bayesian Updating in Environments of Asymmetric Information is composed of three essays: "A Signaling Theory of Managerial Turnover," "Managerial Career Concerns and Termination as a Screening Device," and "A Countersignaling Theory of Advertising and Fads." The three essays have one common thread. In each essay, agents' ability levels are private information. High ability agents signal their private information by placing themselves in positions where Bayesian updating on ability can occur. Thus, in each model, markets disseminate information on agents' abilities in two ways: through signaling and through Bayesian updating. This simple framework provides valuable insights into managerial turnover, managerial termination, and advertising.; "A Signaling Theory of Managerial Turnover" extends the career concerns literature by showing how career concerns can lead to managerial turnover. A model of turnover based on team production and asymmetric information is constructed. Team production makes it difficult, if not impossible, for market participants to learn a manager's individual ability level. Turnover provides an opportunity to further learn managerial ability. As such, high ability managers signal their ability levels by engaging in turnover. The probability of managerial turnover is shown to be decreasing in the cost of turnover, increasing in the variance of firms' perceived abilities, and increasing in the variance of a manager's perceived ability. The predictions of the model are consistent with recent empirical work on managerial turnover.; "Career Concerns and Termination as a Screening Device" contributes to the literature on optimal contracting in the presence of managerial career concerns by examining the role of termination in contracting. A model of project choice and asymmetric information is constructed. In the absence of contracting, lower ability managers take on excessive risk in their choice of projects. Termination serves as a simple screening device that ensures efficient investment. The model explains the use of the nonlinear termination schedules found in the mutual fund, securities analysis, and hedge fund industries and can explain puzzling stylized facts found in recent empirical work on these industries.; "A Countersignaling Theory of Advertising and Fads" extends the literature on countersignaling by developing a countersignaling theory of advertising. Consumers can learn a firm's innate ability to produce quality in two ways: (1) a firm can signal its ability to produce quality by engaging in costly advertising and (2) consumers can receive information on a firm's quality level through word-of-mouth communication. There exists a countersignaling equilibrium in which the highest and lowest ability firms refrain from advertising while average ability firms advertise. Two testable implications emerge from the analysis: the probability of advertising is not monotonically increasing in advertising and the probability of advertising increases as the cost to advertise increases. A simple extension of the basic model shows how producers fuel and crush fads through their advertising decisions.