Cake eating with private information

Abstract

We consider a model of cake eating with private information. The model captures phenomena such as trust and “security of supply” in resource-use relationships. It also predicts supply shocks as an equilibrium phenomenon: privately informed sellers have incentives to reveal resource scarcity too late, through a supply disruption, after which they exploit the consumers’ inability to immediately adjust demand. Two puzzles that common resource-use theories cannot explain are resolved: sellers have an incentive to overstate their resources rather than emphasize scarcity, and consumers switch to alternatives before exhausting the resource thereby leaving socially valuable resource in the ground.