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Hard evidence and welfare in adverse selection environments

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  • PRAM, Kym

Abstract

I consider environments in which an agent with private information can acquire arbitrary hard evidence about his type before interacting with a principal. In a broad class of screening models, I show that there is always an evidence structure that interim Pareto improves over the no-evidence benchmark whenever some types of the agent take an outside option in the benchmark case, and additional weak conditions, including either a single-crossing condition or state-independence of the principal's payoffs, are satisfied. I show that the sufficient conditions are tight and broadly applicable. Addressing concerns about multiple equilibria, I show how a planner can restrict the available evidence to ensure that an equilibrium which interim Pareto-improves over the benchmark case is obtained. Furthermore, I show that Pareto-improving evidence can arise endogenously when agents choose what evidence to acquire (and disclose).

Suggested Citation

  • PRAM, Kym, 2017. "Hard evidence and welfare in adverse selection environments," Economics Working Papers MWP 2017/10, European University Institute.
  • Handle: RePEc:eui:euiwps:mwp2017/10
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    References listed on IDEAS

    as
    1. Giovannoni, Francesco & Seidmann, Daniel J., 2007. "Secrecy, two-sided bias and the value of evidence," Games and Economic Behavior, Elsevier, vol. 59(2), pages 296-315, May.
    2. Bull, Jesse & Watson, Joel, 2007. "Hard evidence and mechanism design," Games and Economic Behavior, Elsevier, vol. 58(1), pages 75-93, January.
    3. Jeanne Hagenbach & Frédéric Koessler & Eduardo Perez‐Richet, 2014. "Certifiable Pre‐Play Communication: Full Disclosure," Econometrica, Econometric Society, vol. 82(3), pages 1093-1131, May.
    4. Bull, Jesse & Watson, Joel, 2004. "Evidence disclosure and verifiability," Journal of Economic Theory, Elsevier, vol. 118(1), pages 1-31, September.
    5. Eduardo Perez-Richet, 2014. "Interim Bayesian Persuasion: First Steps," American Economic Review, American Economic Association, vol. 104(5), pages 469-474, May.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Information Economics; Hard Evidence; Mechanism Design; Microeconomic Theory; Insurance.;

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