Asymmetric Information and Adverse Selection
AbstractThis 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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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 695.
Date of creation: 24 Jan 2014
Date of revision:
asymmetric information; adverse selection; information structures; information acquisition; information disclosure; employer learning;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-04-11 (All new papers)
- NEP-COM-2014-04-11 (Industrial Competition)
- NEP-CTA-2014-04-11 (Contract Theory & Applications)
- NEP-GER-2014-04-11 (German Papers)
- NEP-MIC-2014-04-11 (Microeconomics)
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