Questions tagged [adverse-selection]
The adverse-selection tag has no usage guidance.
20 questions
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Is home insurance priced backwards?
I just saw a rate table for retail home insurance that appears to offer incentives opposite to what insurance should in theory. Am I missing something in the following analysis?
For the same ...
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Dataset where a group is offered a privilege?
I am trying to find a dataset where a population is put through a selection process, after the selection process a treatment is applied, and we know the covariates of the whole population, but perhaps ...
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Information economics
We are in an Insurance Adverse Selection. Assume that consumers differ in their own risk $\pi_i$ distributed on the interval $[\underline \pi, \bar\pi ]=[0, 0.5] $. CDF is as follows $F(\pi)= 2\pi^2 + ...
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Adverse Selection: Positive Selection of Worker Types (Mas-Collel)
I'm reviewing some question from Mas-Collel and I am stuck on a chapter 13 question related to adverse selection.
Consider a model of positive selection in which there are workers of two possible ...
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What does commitment in adverse selection mean?
In this slide deck, p15. it says
"The revelation principle requires that the principal can fully commit to the terms of the contract. If this is not the case, an indirect mechanism, which allows for ...
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What is "indirect mechanism" in the context of adverse selectoin?
On this slide deck, page 12, it says "then this direct mechanism implements exactly the same allocation as the indirect mechanism we started". What is indirect mechanism in this context and in ...
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Rothschild-Stiglitz (RS) Separating Equilibrium
In RS model, where there are only two risk types (high and low risks), there is no pooling equilibrium but a separating one (when there are sufficiently large number of high risks.)
Additionally, ...
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Rotschild&Stiglitz (RS) Equilibrium
In their pathbreaking paper, Rothschild and Stiglitz define the RS Equilibrium as a set of contracts such that,
i) each firm breaks even
ii) there exists no other contracts making non-negative profits ...
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Why is the expected value conditional on the trade taking place in an adverse selection problem?
I have been asked the following question, and I don't understand why the expected value of the firm is conditioned on the trade taking place.
"Suppose that a firm owns a business unit that it wants ...
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Question on uncertainity
Please imagine that Nicole is uncertain of her future wealth. Her wealth in the bad state of the world is zero. Her wealth in the good state is $w>0$. Each state is initially equally likely. ...
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Rothschild-Stiglitz working paper?
I recently rediscovered Rothschild and Stiglitz's classic paper, "Equilibrium in Competitive Insurance Markets".
In footnote 7, they refer to an earlier version of their paper for details on the ...
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Moral hazard vs hidden information.
What is the difference between hidden information and moral hazard?
I cannot understand these two terms mainly. Please explain. Thank you.
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Pareto efficient adverse selection
Please look at the following. Question which I posted.
I did not understand the answer for the part b - Pareto efficient.
I am happy if you explain it in more details. Thank you.
Also please ...
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Multidimensional screening and convexity of the surplus/rent function
I'm starting to read the literature of multidimensional screening models for monopolists selling $n$ goods to a continuum of buyers with $m=n$ dimensional types, and Rochet (1987) proves that a ...
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Binding and slack constraints in adverse selection problem
When I am dealing with a constrained maximization, once I face constraints with inequality sign, I have to understand which one are binding and which others are slack.
If I find that a constraint is ...
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Binding constraints at second-best optimum
I am dealing with ex-ante asymmetric information problems, i.e. adverse selection and in particular I cannot understand what's the intuition behind the fact that only two out of four constraints ...
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Does the concept of Nash-equilibrium conflict with the concept of market equilibrium in the lemon market
Consider a version of Akerlof's Lemon market with two types of sellers. One type sells Quality cars the other type sells Lemons. Buyers' reservation prices are $r_{B,Q}$ for a Quality car and $r_{B,L}$...
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A Deceptive Raffle
Suppose we have a hungry fox. He has a gigantic bunch of spoiled carrots that he cannot eat (and wouldn't eat if they were fresh anyway), but he knows the local bunnies in the neighboring area love ...
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Adverse selection in competitive markets- labor market
I'm referring to the Figure 13.B.1 titled 'A competitive equilibrium with adverse selection' from 'Microeconomics Theory' by Mas Colel et al. It basically graphs the expected value of the workers' ...
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Does the demand for bad quality products increase when there is information asymmetry?
Situation 1 In a situation where we have two markets one with good quality products and the other with bad quality products, if we are in a situation where the buyer knows which is the good product ...
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