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Asymmetric Information and Adverse Selection

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  • Ian Jewitt
  • Clare Leaver
  • Heski Bar-Isaac

Abstract

This paper develops a framework for the analysis of how asymmetric information impacts on adverse selection and market efficiency.� We adopt Akerlof's (1970) unit-demand model extended to a setting with multidimensional public and private information.� Adverse selection and efficiency are defined quantitatively as real valued random variables.� We characterize how public information disclosure and private information acquisition affect the relationship between adverse selection and efficiency.� These results are applied to inform welfare and empirical analysis and, in an employer learning setting, to study the endogenous choice of information structures.� Equilibrium information structures impose adverse selection efficiently.� We show that this makes adverse selection hard to detect using standard positive correlation tests.

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File URL: http://www.economics.ox.ac.uk/materials/papers/13233/paper695.pdf
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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 695.

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Date of creation: 24 Jan 2014
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Handle: RePEc:oxf:wpaper:695

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Keywords: asymmetric information; adverse selection; information structures; information acquisition; information disclosure; employer learning;

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  1. Daron Acemoglu & Jorn-Steffen Pischke, 1996. "Why Do Firms Train? Theory and Evidence," NBER Working Papers 5605, National Bureau of Economic Research, Inc.
  2. Liran Einav & Amy Finkelstein & Mark R. Cullen, 2010. "Estimating Welfare in Insurance Markets Using Variation in Prices," The Quarterly Journal of Economics, MIT Press, vol. 125(3), pages 877-921, August.
  3. Liran Einav & Amy Finkelstein, 2011. "Selection in Insurance Markets: Theory and Empirics in Pictures," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 115-38, Winter.
  4. Jonathan Levin, 2001. "Information and the Market for Lemons," Working Papers 01004, Stanford University, Department of Economics.
  5. Liran Einav & Amy Finkelstein & Jonathan Levin, 2009. "Beyond Testing: Empirical Models of Insurance Markets," NBER Working Papers 15241, National Bureau of Economic Research, Inc.
  6. Joshua C. Pinkston, 2006. "A Model of Asymmetric Employer Learning With Testable Implications," Working Papers 390, U.S. Bureau of Labor Statistics.
  7. de Meza, David & Webb, David C, 2001. "Advantageous Selection in Insurance Markets," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 249-62, Summer.
  8. Paul Milgrom & Robert J. Weber, 1981. "The Value of Information in a Sealed-Bid Auction," Discussion Papers 462, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  10. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  11. Nathaniel Hendren, 2012. "Private Information and Insurance Rejections," NBER Working Papers 18282, National Bureau of Economic Research, Inc.
  12. Greenwald, Bruce C, 1986. "Adverse Selection in the Labour Market," Review of Economic Studies, Wiley Blackwell, vol. 53(3), pages 325-47, July.
  13. Liran Einav & Amy Finkelstein, 2011. "Selection in Insurance Markets: Theory and Empirics in Pictures," NBER Working Papers 16723, National Bureau of Economic Research, Inc.
  14. Gary S. Becker, 1962. "Investment in Human Capital: A Theoretical Analysis," Journal of Political Economy, University of Chicago Press, vol. 70, pages 9.
  15. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
  16. Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 96(4), pages 938-958, September.
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