Three essays on uncertainty and learning by economic agents

Based on the assumption that agent's decisions affect their understanding of their environments I introduce Bayesian updating of beliefs in three different economic models to study how the agent's ability to learn affects the decisions of rational agents.; In Chapter 1 I study a two-period model with an incumbent firm threatened with entry. Demand is unknown and stochastic, and prices contain statistical information about demand. The incumbent's first period decision affects the informativeness of the price level and through it, the probability of entry. Hence the incumbent can manipulate its quantity to discourage entry. In equilibrium, unless the possible demand functions differ by a constant, the incumbent always manipulates first period output to reduce the probability of entry, i.e. limit prices. In particular, if given its prior information the entrant is currently not entering, then the incumbent limit prices by concealing information from the entrant; if at current beliefs the entrant is entering, then the incumbent limit prices by revealing information.; In Chapter 2 I study a model in which fiscal policy determines that for a short period of time the government must rely exclusively on the income from issuing money, but it is uncertain about the way in which monetary policy influences the public's demand for money. I assume that at any point in time the government uses all the information available to it to make the best possible decision, and that as new observations become available the government updates its beliefs about the demand for money using Bayes' rule. The three results of the model are: First, the government values more information about the demand for money as this allows it to make a more accurate decision. Second, if the government can affect the informational content of the demand for money (that is, unless the possible demand functions differ by a constant) it will adjust the rate of growth of the money supply to increase information. Third, under some parameter specifications the government induces a hyperinflation to learn about demand.; In Chapter 3 I study the design of incentive contracts for central bankers when the government and the private sector are imperfectly informed about the central banker's preferences. Since the contract affects the inflation rate set by the bankers, which in turn contains statistical information about the banker's loss function, the government can manipulate the contract to increase information. However, bankers have incentives to manipulate the government's and the public's perception of their preferences and hence they manipulate the inflation rate accordingly, which affects the informational content of each contract and the expected variability of the inflation rate. The interaction of these two effects determines the gains and losses from inducing more transparent monetary policies, and whether bankers should be appointed to one or two periods.