IDEAS home Printed from https://ideas.repec.org/p/pri/econom/2020-50.html
   My bibliography  Save this paper

Inverse Selection

Author

Listed:
  • Markus Brunnermeier

    (Princeton University)

  • Rohit Lamba

    (Pennsylvania State University)

  • Carlos Segura-Rodriguez

    (Banco Central de Costa Rica)

Abstract

Big data, machine learning and AI inverts adverse selection problems. It allows insurers to infer statistical information and thereby reverses information advantage from the insuree to the insurer. In a setting with two-dimensional type space whose correlation can be inferred with big data we derive three results: First, a novel tradeoff between a belief gap and price discrimination emerges. The insurer tries to protect its statistical information by offering only a few screening contracts. Second, we show that forcing the insurance company to reveal its statistical information can be welfare improving. Third, we show in a setting with naive agents that do not perfectly infer statistical information from the price of offered contracts, price discrimination significantly boosts insurer’s profits. We also discuss the significance our analysis through three stylized facts: the rise of data brokers, the importance of consumer activism and regulatory forbearance, and merits of a public data repository.

Suggested Citation

  • Markus Brunnermeier & Rohit Lamba & Carlos Segura-Rodriguez, 2020. "Inverse Selection," Working Papers 2020-50, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2020-50
    as

    Download full text from publisher

    File URL: https://scholar.princeton.edu/sites/default/files/markus/files/inverse_selection_bls_24april2020.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-1797, November.
    2. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    3. Villeneuve, Bertrand, 2005. "Competition between insurers with superior information," European Economic Review, Elsevier, vol. 49(2), pages 321-340, February.
    4. George J. Mailath & Andrew Postlewaite, 1990. "Asymmetric Information Bargaining Problems with Many Agents," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(3), pages 351-367.
    5. Koessler, Frederic & Skreta, Vasiliki, 2019. "Selling with evidence," Theoretical Economics, Econometric Society, vol. 14(2), May.
    6. Hanming Fang & Michael P. Keane & Dan Silverman, 2008. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 303-350, April.
    7. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
    8. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
    9. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 629-649.
    10. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
    11. Tymofiy Mylovanov & Thomas Tröger, 2014. "Mechanism Design by an Informed Principal: Private Values with Transferable Utility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(4), pages 1668-1707.
    12. repec:dau:papers:123456789/5356 is not listed on IDEAS
    13. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
    14. 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.
    15. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    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. Sumit Agarwal & John R. Grigsby & Ali Hortaçsu & Gregor Matvos & Amit Seru, 2020. "Searching for Approval," Working Papers 2020-1, Princeton University. Economics Department..

    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. Anastasios Dosis, 2022. "On the informed principal model with common values," RAND Journal of Economics, RAND Corporation, vol. 53(4), pages 792-825, December.
    2. Koessler, Frederic & Skreta, Vasiliki, 2019. "Selling with evidence," Theoretical Economics, Econometric Society, vol. 14(2), May.
    3. Xin Zhao, 2023. "Auction design by an informed seller: A foundation of reserve price signalling," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(3), pages 1161-1190, August.
    4. Koessler, Frédéric & Skreta, Vasiliki, 2016. "Informed seller with taste heterogeneity," Journal of Economic Theory, Elsevier, vol. 165(C), pages 456-471.
    5. Bedard, Nicholas C., 2017. "The strategically ignorant principal," Games and Economic Behavior, Elsevier, vol. 102(C), pages 548-561.
    6. Marco Ottaviani & Andrea Prat, 2001. "The Value of Public Information in Monopoly," Econometrica, Econometric Society, vol. 69(6), pages 1673-1683, November.
    7. Bara Kim & Seung Han Yoo, 2022. "Grand Mechanism and Population Uncertainty," Discussion Paper Series 2204, Institute of Economic Research, Korea University.
    8. Balkenborg, Dieter & Makris, Miltiadis, 2015. "An undominated mechanism for a class of informed principal problems with common values," Journal of Economic Theory, Elsevier, vol. 157(C), pages 918-958.
    9. Dionne, Georges & Fombaron, Nathalie & Doherty, Neil, 2012. "Adverse selection in insurance contracting," Working Papers 12-8, HEC Montreal, Canada Research Chair in Risk Management.
    10. Gaudeul, Alexia, 2009. "A (micro) course in microeconomic theory for MSc students," MPRA Paper 15388, University Library of Munich, Germany.
    11. Nishimura, Takeshi, 2022. "Informed principal problems in bilateral trading," Journal of Economic Theory, Elsevier, vol. 204(C).
    12. Davoodalhosseini, Seyed Mohammadreza, 2019. "Constrained efficiency with adverse selection and directed search," Journal of Economic Theory, Elsevier, vol. 183(C), pages 568-593.
    13. Vasiliki Skreta, 2011. "On the informed seller problem: optimal information disclosure," Review of Economic Design, Springer;Society for Economic Design, vol. 15(1), pages 1-36, March.
    14. Charles Z. Zheng, 2016. "Goethe's secret reserve price," International Journal of Economic Theory, The International Society for Economic Theory, vol. 12(1), pages 41-48, March.
    15. Francesco Giovannoni & Toomas Hinnosaar, 2022. "Pricing Novel Goods," Papers 2208.04985, arXiv.org.
    16. Andrea Attar & Thomas Mariotti & François Salanié, 2021. "Entry-Proofness and Discriminatory Pricing under Adverse Selection," American Economic Review, American Economic Association, vol. 111(8), pages 2623-2659, August.
    17. Skreta, Vasiliki & Koessler, Frédéric, 2021. "Information Design by an Informed Designer," CEPR Discussion Papers 15709, C.E.P.R. Discussion Papers.
    18. Jin Yeub Kim, 2022. "Neutral public good mechanisms," PLOS ONE, Public Library of Science, vol. 17(4), pages 1-16, April.
    19. Sergei Severinov & Grigory Kosenok, 2004. "Individually Rational, Balanced-Budget Bayesian Mechanisms and the," 2004 Meeting Papers 633, Society for Economic Dynamics.
    20. Takeshi Nishimura, 2019. "Informed Principal Problems in Bilateral Trading," Papers 1906.10311, arXiv.org, revised Feb 2022.

    More about this item

    Keywords

    Insurance; Big Data; Informed Principal; Belief Gap; Price Discrimination;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:pri:econom:2020-50. 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: Bobray Bordelon (email available below). General contact details of provider: https://economics.princeton.edu/working-papers/ .

    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.