IDEAS home Printed from https://ideas.repec.org/a/eee/eecrev/v76y2015icp47-59.html
   My bibliography  Save this article

Reputation for quality and adverse selection

Author

Listed:
  • Kawai, Keiichi

Abstract

We analyze a dynamic market with a seller who can make a one-time investment that affects the returns of tradable assets. The potential buyers of the assets cannot observe the seller׳s investment prior to the trade or verify it in any way after the trade. The market faces two types of inefficiency: the ex-ante inefficiency, i.e., the seller׳s moral hazard problem, and the ex-post inefficiency, i.e., inefficient ex-post allocations due to the adverse selection problem. We analyze how the observability of information by future buyers, through which the seller builds a reputation, affects the two types of inefficiency as well as the interplay between them.

Suggested Citation

  • Kawai, Keiichi, 2015. "Reputation for quality and adverse selection," European Economic Review, Elsevier, vol. 76(C), pages 47-59.
    • Handle: RePEc:eee:eecrev:v:76:y:2015:i:c:p:47-59
    DOI: 10.1016/j.euroecorev.2015.02.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0014292115000240
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.euroecorev.2015.02.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Maarten C. W. Janssen & Santanu Roy, 2002. "Dynamic Trading in a Durable Good Market with Asymmetric Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 257-282, February.
    2. Gul, Faruk, 2001. "Unobservable Investment and the Hold-Up Problem," Econometrica, Econometric Society, vol. 69(2), pages 343-376, March.
    3. Giovanni Maggi & Andres Rodriguez-Clare, 1995. "Costly Distortion of Information in Agency Problems," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 675-689, Winter.
    4. Jeffrey Ely & Drew Fudenberg & David K. Levine, 2008. "When is reputation bad?," World Scientific Book Chapters, in: Drew Fudenberg & David K Levine (ed.), A Long-Run Collaboration On Long-Run Games, chapter 10, pages 177-205, World Scientific Publishing Co. Pte. Ltd..
    5. Jeffrey C. Ely & Juuso Välimäki, 2003. "Bad Reputation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(3), pages 785-814.
    6. Kawai, Keiichi, 2014. "Dynamic market for lemons with endogenous quality choice by the seller," Games and Economic Behavior, Elsevier, vol. 84(C), pages 152-162.
    7. Benjamin E. Hermalin, 2013. "Unobserved investment, endogenous quality, and trade," RAND Journal of Economics, RAND Corporation, vol. 44(1), pages 33-55, March.
    8. Patrick Gonzàlez, 2004. "Investment and Screening Under Asymmetric Endogenous Information," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 502-519, Autumn.
    9. Hartman-Glaser, Barney & Piskorski, Tomasz & Tchistyi, Alexei, 2012. "Optimal securitization with moral hazard," Journal of Financial Economics, Elsevier, vol. 104(1), pages 186-202.
    10. Haubrich, Joseph G, 1988. "Optimal Financial Structure in Exchange Economies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 217-235, May.
    11. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
    12. Schmitz, Patrick W., 2002. "On the Interplay of Hidden Action and Hidden Information in Simple Bilateral Trading Problems," Journal of Economic Theory, Elsevier, vol. 103(2), pages 444-460, April.
    13. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    14. Johannes Hörner & Nicolas Vieille, 2009. "Public vs. Private Offers in the Market for Lemons," Econometrica, Econometric Society, vol. 77(1), pages 29-69, January.
    15. Schmitz, Patrick W., 2010. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 807-816, September.
    16. Harold L. Cole & Narayana R. Kocherlakota, 2001. "Efficient Allocations with Hidden Income and Hidden Storage," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(3), pages 523-542.
    17. V.V. Chari & Ali Shourideh & Ariel Zetlin-Jones, 2010. "Adverse Selection, Reputation and Sudden Collapses in Secondary Loan Markets," NBER Working Papers 16080, National Bureau of Economic Research, Inc.
    18. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
    19. Joel S. Demski & David E.M. Sappington, 1991. "Resolving Double Moral Hazard Problems with Buyout Agreements," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 232-240, Summer.
    20. Simon Board & Moritz Meyer‐ter‐Vehn, 2013. "Reputation for Quality," Econometrica, Econometric Society, vol. 81(6), pages 2381-2462, November.
    21. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
    22. Allen, Franklin, 1985. "Repeated principal-agent relationships with lending and borrowing," Economics Letters, Elsevier, vol. 17(1-2), pages 27-31.
    23. Stephanie Lau, 2008. "Information and bargaining in the hold‐up problem," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 266-282, March.
    24. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(1), pages 307-362.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hechem Ajmi & Salina Kassim & Hassanuddeen Abdul Aziz & Walid Mansour, 2019. "A Literature Review of Financial Contracting Theory from the Islamic and Conventional Overviews: Contributions, Gaps, and Perspectives استعراض أدبيات نظرية التعاقد المالي من المنظور الإسلامي والتقليدي," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 32(2), pages 25-42, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kawai, Keiichi, 2014. "Dynamic market for lemons with endogenous quality choice by the seller," Games and Economic Behavior, Elsevier, vol. 84(C), pages 152-162.
    2. Maria Goltsman, 2011. "Optimal information transmission in a holdup problem," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 495-526, September.
    3. Rao, Neel, 2022. "Search equilibrium with unobservable investment," Games and Economic Behavior, Elsevier, vol. 133(C), pages 300-330.
    4. Erol Akçay & Adam Meirowitz & Kristopher W. Ramsay, 2018. "Two-sided unobservable investment, bargaining, and efficiency," Review of Economic Design, Springer;Society for Economic Design, vol. 22(3), pages 123-147, December.
    5. Lau, Stephanie, 2011. "Investment incentives in bilateral trading," Games and Economic Behavior, Elsevier, vol. 73(2), pages 538-552.
    6. Rao, Neel, 2015. "General training in labor markets: Common value auctions with unobservable investment," Journal of Economic Behavior & Organization, Elsevier, vol. 120(C), pages 19-45.
    7. Attar, Andrea & Mariotti, Thomas & Salanié, François, 2021. "Competitive Nonlinear Pricing under Adverse Selection," TSE Working Papers 21-1201, Toulouse School of Economics (TSE), revised Aug 2022.
    8. Matthew J. Botsch, 2022. "Public and Private Benefits of Information in Markets for Securitized Assets," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 48(3), pages 319-365, June.
    9. Brendan Daley & Brett Green & Victoria Vanasco, 2020. "Securitization, Ratings, and Credit Supply," Journal of Finance, American Finance Association, vol. 75(2), pages 1037-1082, April.
    10. Yunzhi Hu & Felipe Varas, 2021. "A Theory of Zombie Lending," Journal of Finance, American Finance Association, vol. 76(4), pages 1813-1867, August.
    11. Stephanie Rosenkranz & Patrick W. Schmitz, 2007. "Can Coasean Bargaining Justify Pigouvian Taxation?," Economica, London School of Economics and Political Science, vol. 74(296), pages 573-585, November.
    12. Vladimir Asriyan & Victoria Vanasco, 2019. "Security Design in Non-Exclusive Markets with Asymmetric Information," Working Papers 1164, Barcelona School of Economics.
    13. Pagès, Henri, 2013. "Bank monitoring incentives and optimal ABS," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 30-54.
    14. Manuel Adelino & Kristopher Gerardi & Barney Hartman-Glaser, 2016. "Are Lemons Sold First? Dynamic Signaling in the Mortgage Market," FRB Atlanta Working Paper 2016-8, Federal Reserve Bank of Atlanta.
    15. Sascha Tobias Wengerek & Benjamin Hippert & André Uhde, 2019. "Risk allocation through securitization - Evidence from non-performing loans," Working Papers Dissertations 58, Paderborn University, Faculty of Business Administration and Economics.
    16. Hartman-Glaser, Barney & Piskorski, Tomasz & Tchistyi, Alexei, 2012. "Optimal securitization with moral hazard," Journal of Financial Economics, Elsevier, vol. 104(1), pages 186-202.
    17. Kuncl, Martin, 2019. "Securitization under asymmetric information over the business cycle," European Economic Review, Elsevier, vol. 111(C), pages 237-256.
    18. Bougheas, Spiros & Worrall, Tim, 2012. "Cost padding in regulated monopolies," International Journal of Industrial Organization, Elsevier, vol. 30(4), pages 331-341.
    19. Fuchs, William & Green, Brett & Papanikolaou, Dimitris, 2016. "Adverse selection, slow-moving capital, and misallocation," Journal of Financial Economics, Elsevier, vol. 120(2), pages 286-308.
    20. Matthieu Bouvard & Raphaël Levy, 2018. "Two-Sided Reputation in Certification Markets," Management Science, INFORMS, vol. 64(10), pages 4755-4774, October.

    More about this item

    Keywords

    Adverse selection; Moral hazard;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eecrev:v:76:y:2015:i:c:p:47-59. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eer .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.