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Group Characteristics Evolution Arising from Asymmetric Information

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  • Wilfredo Leiva Maldonado

    (Graduate School of Economics, Catholic University of Brasilia (UCB), Brazil)

  • Adolfo Sachsida

    (Institute of Applied Economic Research (DIMAC), Brazil)

Abstract

In asymmetric information problems, agents with less information (principals or contractors) usually take as given the preferences of agents with more information (agents or contractees). Moreover, the distribution of characteristics of contractees is supposed to be invariant. In this article we consider a mixed framework of asymmetric information (adverse selection followed by moral hazard) where those two assumptions are excluded. Specifically, the contractor only knows the current distribution of characteristics and the contractees may change them after signing the contract, if this improves their welfare. Thus, we find that the asymmetric information problem leads to a group effect (changes of characteristics). This feedback defines a sequence of temporary equilibria. We provide conditions for the convergence of that sequence to a stationary long run equilibrium. We also prove that both temporary equilibrium and long-run equilibrium coincide with the equilibrium in classical models of adverse selection and the moral hazard problem vanishes in the long-run..

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Bibliographic Info

Article provided by ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics] in its journal Economia.

Volume (Year): 13 (2012)
Issue (Month): 2 ()
Pages: 247_269

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Handle: RePEc:anp:econom:v:13:y:2012:i:2:247_269

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Related research

Keywords: Asymmetric Information; Mixed Models; Group Effect; Characteristics Evolution;

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  1. Pradeep Dubey & John Geanakoplos & Martin Shubik, 2001. "Default and Punishment in General Equilibrium," Cowles Foundation Discussion Papers 1304R5, Cowles Foundation for Research in Economics, Yale University, revised Mar 2004.
  2. Edward L. Glaeser & Bruce Sacerdote & Jose A. Scheinkman, 1995. "Crime and Social Interactions," NBER Working Papers 5026, National Bureau of Economic Research, Inc.
  3. Gropp, Reint & Scholz, John Karl & White, Michelle J, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 217-51, February.
  4. Ania, Ana B. & Troger, Thomas & Wambach, Achim, 2002. "An evolutionary analysis of insurance markets with adverse selection," Games and Economic Behavior, Elsevier, vol. 40(2), pages 153-184, August.
  5. Jonathan Guryan, 2001. "Desegregation and Black Dropout Rates," NBER Working Papers 8345, National Bureau of Economic Research, Inc.
  6. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
  7. Landsberger, Michael & Meilijson, Isaac, 1996. "Extraction of Surplus under Adverse Selection: The Case of Insurance Markets," Journal of Economic Theory, Elsevier, vol. 69(1), pages 234-239, April.
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