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Information Gathering, Disclosure and Contracting in Competitive Markets

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    Abstract

    The paper studies the determinants of information gathering in insurance and credit markets. In our set-up, information may have either operational or strategic value, e.g. it may improve allocative decisions or allow agents to appropriate a larger share of gains from trade at the contracting stage. The timing of information gathering is endogenous and agents can gather information either before or after contracting. Access to precontractual information generates a negative contracting externality, which was first identified in Hirshleifer.s (1971) seminal contribution. In contrast with a well established conventional wisdom and a substantial literature, we prove that, if the operational value of information is positive and not "too small", private returns of information fall short of its social returns, and pre-contractual access to information leads to under-investment . On the contrary, agents over-invest in information gathering activities, when the operational value of the available signals is sufficiently low. Consistently with contractual arrangements observed in the real world, we also show that equilibrium contracts have also a very simple shape when private information can be voluntarily disclosed.

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    File URL: http://www.csef.it/WP/wp190.pdf
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    Bibliographic Info

    Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 190.

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    Date of creation: 01 Jan 2008
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    Handle: RePEc:sef:csefwp:190

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    Related research

    Keywords: private information; information gathering; value of information;

    This paper has been announced in the following NEP Reports:

    References

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    1. Dirk Bergemann & Juuso Valimaki, 2002. "Information Acquisition and Efficient Mechanism Design," Econometrica, Econometric Society, vol. 70(3), pages 1007-1033, May.
    2. Nicola Persico, 2000. "Information Acquisition in Auctions," Econometrica, Econometric Society, vol. 68(1), pages 135-148, January.
    3. Susan Athey, 2002. "Monotone Comparative Statics Under Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 187-223, February.
    4. Athey, Susan, 2002. "Monotone Comparative Statics Under Uncertainty," Scholarly Articles 3372263, Harvard University Department of Economics.
    5. Compte, Olivier & Jehiel, Philippe, 2008. "Gathering information before signing a contract: A screening perspective," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 206-212, January.
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    Cited by:
    1. Francesca Barigozzi & Dominique Henriet, 2008. "Genetic Information: Comparing Alternative Regulatory Approaches when Prevention Matters," CHILD Working Papers wp01_09, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
    2. Annamaria Menichini & Peter Simmons, 2008. "Sorting the Good Guys from Bad: On the Optimality of Deterministic Audit with Ex-Ante Information Acquisition," CSEF Working Papers 201, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 27 Oct 2012.

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