Asymmetric Information and Adverse Selection
This 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.
|Date of creation:||24 Jan 2014|
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- Liran Einav & Amy Finkelstein & Jonathan Levin, 2010.
"Beyond Testing: Empirical Models of Insurance Markets,"
Annual Review of Economics,
Annual Reviews, vol. 2(1), pages 311-336, September.
- Liran Einav & Amy Finkelstein & Jonathan Levin, 2009. "Beyond Testing: Empirical Models of Insurance Markets," NBER Working Papers 15241, National Bureau of Economic Research, Inc.
- Einav, Liran & Finkelstein, Amy & Levin, Jonathan, 2009. "Beyond Testing: Empirical Models of Insurance Markets," Department of Economics, Working Paper Series qt90g407hf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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- Nathaniel Hendren, 2012. "Private Information and Insurance Rejections," NBER Working Papers 18282, National Bureau of Economic Research, Inc.
- Liran Einav & Amy Finkelstein & Mark R. Cullen, 2010. "Estimating Welfare in Insurance Markets Using Variation in Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 877-921.
- de Meza, David & Webb, David C, 2001. "Advantageous Selection in Insurance Markets," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 249-262, Summer.
- De Meza, D. & Webb, D.C., 2000. "Advantageous Selection in Insurance Market," Discussion Papers 0007, Exeter University, Department of Economics.
- Joshua C. Pinkston, 2009. "A Model of Asymmetric Employer Learning with Testable Implications," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 367-394.
- Joshua C. Pinkston, 2006. "A Model of Asymmetric Employer Learning With Testable Implications," Working Papers 390, U.S. Bureau of Labor Statistics.
- Levin, Jonathan, 2001. "Information and the Market for Lemons," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 657-666, Winter.
- Jonathan Levin, 2001. "Information and the Market for Lemons," Working Papers 01004, Stanford University, Department of Economics.
- Milgrom, Paul & Weber, Robert J., 1982. "The value of information in a sealed-bid auction," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 105-114, June.
- Paul Milgrom & Robert J. Weber, 1981. "The Value of Information in a Sealed-Bid Auction," Discussion Papers 462, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Liran Einav & Amy Finkelstein, 2011. "Selection in Insurance Markets: Theory and Empirics in Pictures," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 115-138, Winter.
- Liran Einav & Amy Finkelstein, 2011. "Selection in Insurance Markets: Theory and Empirics in Pictures," NBER Working Papers 16723, National Bureau of Economic Research, Inc.
- Liran Einav & Amy Finkelstein, 2011. "Selection in Insurance Markets: Theory and Emprirics in Pictures," Discussion Papers 10-016, Stanford Institute for Economic Policy Research.
- Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-574, September.
- Bruce C. Greenwald, 1986. "Adverse Selection in the Labour Market," Review of Economic Studies, Oxford University Press, vol. 53(3), pages 325-347.
- 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.
- George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500. Full references (including those not matched with items on IDEAS)
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