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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. Alessandro Acquisti & Curtis Taylor & Liad Wagman, 2016. "The Economics of Privacy," Journal of Economic Literature, American Economic Association, vol. 54(2), pages 442-492, June.
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    18. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
    19. Chade, Hector & Schlee, Edward E., 2020. "Insurance as a lemons market: Coverage denials and pooling," Journal of Economic Theory, Elsevier, vol. 189(C).
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Martin Eling & Irina Gemmo & Danjela Guxha & Hato Schmeiser, 2024. "Big data, risk classification, and privacy in insurance markets," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 49(1), pages 75-126, March.
    2. 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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