Questions tagged [adverse-selection]

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9
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1answer
197 views

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 ...
5
votes
2answers
522 views

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 $r_{B,L}$...
5
votes
2answers
95 views

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 ...
4
votes
1answer
51 views

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 ...
4
votes
2answers
77 views

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 ...
4
votes
1answer
316 views

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' ...
3
votes
3answers
3k views

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.
3
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1answer
65 views

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 + ...
3
votes
1answer
92 views

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 ...
2
votes
1answer
318 views

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. ...
2
votes
1answer
177 views

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 ...
2
votes
3answers
2k views

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 ...
1
vote
1answer
148 views

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, ...
1
vote
1answer
1k views

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 ...
1
vote
1answer
284 views

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 ...
1
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0answers
25 views

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 ...
0
votes
1answer
98 views

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 ...
0
votes
0answers
905 views

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 ...