Building parable economies embedding econometricians, we view alternative estimators (Instrumental variables, fuzzy regression discontinuity, natural experiments, OLS, event studies) from the perspective of privately informed decision-makers, e.g., CFOs. Instrumental variable estimates can be misleading since randomization through observable instruments eliminates signal content arising from discretion. If the goal is informing discretionary decisions, rather than predicting outcomes after forced/mistaken actions, instrumentation is problematic, whereas OLS or event studies can be sufficient. The analysis shows that the utility of alternative estimators hinges upon often neglected assumptions about agent/econometrician information sets, as distinct from exclusion restrictions. We recommend parable economy estimation before real-world IV estimation.

Abstract We establish limitations to the usage of direct revelation mechanisms (DRMs) by corporations seeking decision-relevant information in economies with securities markets. In this environment, posting a DRM increases the informed agent’s outside option: if the agent rejects the DRM, he convinces the market he is uninformed, and he can aggressively trade with low price impact, thereby generating large (off-equilibrium) trading gains. This endogenous outside option may make using a DRM to screen uninformed agents impossible. When screening is possible, solely relying on the market for information is optimal if the increase in outside option is sufficiently large. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.