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Disclosure, welfare and adverse selection

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  • Pram, Kym

Abstract

I consider a broad class of economic environments where a principal contracts with an agent under adverse selection and the agent can credibly disclose information to the principal. I show that there is an equilibrium that interim Pareto dominates the equilibrium without evidence if and only if the optimal mechanism without evidence assigns the outside option to a set of types satisfying a ‘gains from trade’ property. The results apply to a range of economic environments including insurance markets, financial markets and goods markets with quality-based price discrimination.

Suggested Citation

  • Pram, Kym, 2021. "Disclosure, welfare and adverse selection," Journal of Economic Theory, Elsevier, vol. 197(C).
    • Handle: RePEc:eee:jetheo:v:197:y:2021:i:c:s0022053121001447
    DOI: 10.1016/j.jet.2021.105327
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    References listed on IDEAS

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    1. Dirk Bergemann & Benjamin Brooks & Stephen Morris, 2015. "The Limits of Price Discrimination," American Economic Review, American Economic Association, vol. 105(3), pages 921-957, March.
    2. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-483, December.
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    12. PRAM, Kym, 2017. "Hard evidence and welfare in adverse selection environments," Economics Working Papers MWP 2017/10, European University Institute.
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    Cited by:

    1. Jose Higueras, 2023. "Robust Regulation of Firms' Access to Consumer Data," Papers 2305.05822, arXiv.org, revised Mar 2024.

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    More about this item

    Keywords

    Disclosure; Adverse selection; Mechanism design; Privacy;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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