Private cost information and entrepreneurial moral hazard are serious problems that result from the significant information asymmetry associated with creators and their backers in reward-based crowdfunding. We establish a dynamic game-theoretic model to investigate the effect of moral hazard on the quality and price decisions of a creator (male) when his cost efficiency is unobservable. Backers (female) in the crowdfunding stage directly observe neither the cost efficiency nor the product quality of the creator. They then make pledge decisions based on expectations about the quality after observing the campaign parameter signals (i.e., the reward price and funding goal) and whether the regulation mechanism is implemented with a strong hand (tighter regulations mean that the creators have less moral hazard). We find that compared with the information symmetry case, when the efficiency of creators is not known to backers, an efficient creator always provides a higher level of product quality when moral hazard is present but not always when moral hazard is absent. In addition, we investigate the effect of moral hazard on the creator and consumer surplus when the creator's cost efficiency is unobservable. Interestingly, we show that moral hazard may benefit both the creator and consumers. This explains the puzzling measures of some reward crowdfunding platforms such as Kickstarter and Indiegogo, which take no active role in managing or monitoring the entrepreneurial projects. Finally, we find that reasonably the efficient creator can better signal his efficiency by using two signaling devices, i.e., the reward price and funding goal; in this case, interestingly, the existence of moral hazard may still benefit both the creators and consumers. This confirms the robustness of our main results.
{"title":"Quality and Pricing Decisions for Reward-based Crowdfunding: Effects of Moral Hazard","authors":"Feiyang Shen, Lijun Ma, T. Choi, Weili Xue","doi":"10.2139/ssrn.3925914","DOIUrl":"https://doi.org/10.2139/ssrn.3925914","url":null,"abstract":"Private cost information and entrepreneurial moral hazard are serious problems that result from the significant information asymmetry associated with creators and their backers in reward-based crowdfunding. We establish a dynamic game-theoretic model to investigate the effect of moral hazard on the quality and price decisions of a creator (male) when his cost efficiency is unobservable. Backers (female) in the crowdfunding stage directly observe neither the cost efficiency nor the product quality of the creator. They then make pledge decisions based on expectations about the quality after observing the campaign parameter signals (i.e., the reward price and funding goal) and whether the regulation mechanism is implemented with a strong hand (tighter regulations mean that the creators have less moral hazard). We find that compared with the information symmetry case, when the efficiency of creators is not known to backers, an efficient creator always provides a higher level of product quality when moral hazard is present but not always when moral hazard is absent. In addition, we investigate the effect of moral hazard on the creator and consumer surplus when the creator's cost efficiency is unobservable. Interestingly, we show that moral hazard may benefit both the creator and consumers. This explains the puzzling measures of some reward crowdfunding platforms such as Kickstarter and Indiegogo, which take no active role in managing or monitoring the entrepreneurial projects. Finally, we find that reasonably the efficient creator can better signal his efficiency by using two signaling devices, i.e., the reward price and funding goal; in this case, interestingly, the existence of moral hazard may still benefit both the creators and consumers. This confirms the robustness of our main results.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"75 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-09-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132234095","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies a dynamic principal-agent setting in which the principal needs to dynamically schedule an agent to work or rest. When the agent is motivated to work, the arrival rate of a Poisson process increases, which increases the principal's payoff. Resting, on the other hand, serves as a threat to the agent by delaying future payments. A key feature of our setting is a switching cost whenever the agent stops resting and starts working. We formulate the problem as an optimal control model with switching, and fully characterize the optimal control policies under different parameter settings. Our analysis shows that when the switching cost is not too high, the optimal contract demonstrates a generalized control-band structure, and may involve randomly switching the agent to rest. The length of each resting episode, on the other hand, is fixed. Overall, the optimal contract is easy to describe, compute, and implement.
{"title":"Punish Underperformance with Resting Optimal Dynamic Contracts in the Presence of Switching Cost","authors":"P. Cao, Peng Sun, Feng Tian","doi":"10.2139/ssrn.3924930","DOIUrl":"https://doi.org/10.2139/ssrn.3924930","url":null,"abstract":"This paper studies a dynamic principal-agent setting in which the principal needs to dynamically schedule an agent to work or rest. When the agent is motivated to work, the arrival rate of a Poisson process increases, which increases the principal's payoff. Resting, on the other hand, serves as a threat to the agent by delaying future payments. A key feature of our setting is a switching cost whenever the agent stops resting and starts working. We formulate the problem as an optimal control model with switching, and fully characterize the optimal control policies under different parameter settings. Our analysis shows that when the switching cost is not too high, the optimal contract demonstrates a generalized control-band structure, and may involve randomly switching the agent to rest. The length of each resting episode, on the other hand, is fixed. Overall, the optimal contract is easy to describe, compute, and implement.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"76 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-09-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126203119","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper reconsiders the Rothschild-Stiglitz insurance market model by information theory. The seminal work by Rothschild and Stiglitz (1978) has become one of the standard models of insurance markets. However, there are a couple of issues that economists find it difficult to understand with this model. First, this model shows that all the equilibria are separating equilibria, and such separating equilibria may not exist under certain conditions. Second, this model is based on the indifference curves of the insurance consumers' utility functions which could be difficult to obtain empirically. This paper attempts to overcome these difficulties by using what Spence called "indices" of observable and unalterable attributes of insurance consumers. This paper approaches the problem as a sequential Bayesian game (a dynamic game with incomplete information), and uses information theory to estimate the costs and benefits of the information contained in indices. Consequently, this paper shows that if the costs and benefits of information fall within certain ranges, using indices is sufficient to avoid the non-existence of equilibria. Furthermore, obtaining indices is easier than specifying the utility function for each insurance consumer.
{"title":"A reconsideration of the Rothschild-Stiglitz insurance market model by information theory","authors":"Robert Mamada","doi":"10.2139/ssrn.3923946","DOIUrl":"https://doi.org/10.2139/ssrn.3923946","url":null,"abstract":"This paper reconsiders the Rothschild-Stiglitz insurance market model by information theory. The seminal work by Rothschild and Stiglitz (1978) has become one of the standard models of insurance markets. However, there are a couple of issues that economists find it difficult to understand with this model. First, this model shows that all the equilibria are separating equilibria, and such separating equilibria may not exist under certain conditions. Second, this model is based on the indifference curves of the insurance consumers' utility functions which could be difficult to obtain empirically. This paper attempts to overcome these difficulties by using what Spence called \"indices\" of observable and unalterable attributes of insurance consumers. This paper approaches the problem as a sequential Bayesian game (a dynamic game with incomplete information), and uses information theory to estimate the costs and benefits of the information contained in indices. Consequently, this paper shows that if the costs and benefits of information fall within certain ranges, using indices is sufficient to avoid the non-existence of equilibria. Furthermore, obtaining indices is easier than specifying the utility function for each insurance consumer.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"110 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-09-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122563939","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies how punishment affects future compliance behavior and isolates deterrence effects mediated by learning. Using administrative data from speed cameras that capture the full driving histories of more than a million cars over several years, we evaluate responses to punishment at the extensive (receiving a speeding ticket) and intensive margin (tickets with higher fines). Two complementary empirical strategies a regression discontinuity design and an event study coherently document strong responses to receiving a ticket: the speeding rate drops by a third and reoffense rates fall by 70% Higher fines produce a small but imprecisely estimated additional effect. All responses occur immediately and are persistent over time, with no backsliding towards speeding even two years after receiving a ticket. Our evidence rejects unlearning and temporary salience effects. Instead, it supports a learning model in which agents update their priors on the expected punishment in a coarse manner.
{"title":"Learning from Law Enforcement","authors":"L. Dušek, C. Traxler","doi":"10.1093/jeea/jvab037","DOIUrl":"https://doi.org/10.1093/jeea/jvab037","url":null,"abstract":"\u0000 This paper studies how punishment affects future compliance behavior and isolates deterrence effects mediated by learning. Using administrative data from speed cameras that capture the full driving histories of more than a million cars over several years, we evaluate responses to punishment at the extensive (receiving a speeding ticket) and intensive margin (tickets with higher fines). Two complementary empirical strategies a regression discontinuity design and an event study coherently document strong responses to receiving a ticket: the speeding rate drops by a third and reoffense rates fall by 70% Higher fines produce a small but imprecisely estimated additional effect. All responses occur immediately and are persistent over time, with no backsliding towards speeding even two years after receiving a ticket. Our evidence rejects unlearning and temporary salience effects. Instead, it supports a learning model in which agents update their priors on the expected punishment in a coarse manner.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"70 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-09-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127337917","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Firms in decentralized markets often trade using quantity contracts, agreements that specify quantity in advance of trade. We show that firms use quantity contracts to reduce the costs of trading frictions. Specifically, quantity contracts are valuable for two reasons. First, they increase trade between high surplus trading partners because they lock in trade prior to the point of sale. Second, they provide quantity insurance -- we show that buyers and sellers are endogenously risk averse with respect to quantity. However, quantity contracts are costly due to their inflexibility to market conditions. Using proprietary invoice data from a large seller, we estimate a model of quantity contracts in the pulp and paper industry. We find that the median value of a quantity contract is 10% of net price. The median value would be 25% lower without quantity insurance and 84% higher without the cost of inflexibility. As trading frictions diminish, the seller uses fewer quantity contracts and profits increase.
{"title":"Pulp Friction: The Value of Quantity Contracts in Decentralized Markets","authors":"J. Tolvanen, Olivier Darmouni, Simon Essig Aberg","doi":"10.2139/ssrn.3919592","DOIUrl":"https://doi.org/10.2139/ssrn.3919592","url":null,"abstract":"Firms in decentralized markets often trade using quantity contracts, agreements that specify quantity in advance of trade. We show that firms use quantity contracts to reduce the costs of trading frictions. Specifically, quantity contracts are valuable for two reasons. First, they increase trade between high surplus trading partners because they lock in trade prior to the point of sale. Second, they provide quantity insurance -- we show that buyers and sellers are endogenously risk averse with respect to quantity. However, quantity contracts are costly due to their inflexibility to market conditions. Using proprietary invoice data from a large seller, we estimate a model of quantity contracts in the pulp and paper industry. We find that the median value of a quantity contract is 10% of net price. The median value would be 25% lower without quantity insurance and 84% higher without the cost of inflexibility. As trading frictions diminish, the seller uses fewer quantity contracts and profits increase.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-09-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115958338","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Information asymmetries are known in theory to lead to inefficiently low credit provision, yet empirical estimates of the resulting welfare losses are scarce. This paper leverages a randomized experiment conducted by a large fintech lender to estimate welfare losses arising from asymmetric information in the market for online consumer credit. Building on methods from the insurance literature, we show how exogenous variation in interest rates can be used to estimate borrower demand and lender cost curves and recover implied welfare losses. While asymmetric information generates large equilibrium price distortions, we find only small overall welfare losses, particularly for high-credit-score borrowers.
{"title":"Measuring the Welfare Cost of Asymmetric Information in Consumer Credit Markets","authors":"A. DeFusco, Huan Tang, Constantine Yannelis","doi":"10.2139/ssrn.3912968","DOIUrl":"https://doi.org/10.2139/ssrn.3912968","url":null,"abstract":"Information asymmetries are known in theory to lead to inefficiently low credit provision, yet empirical estimates of the resulting welfare losses are scarce. This paper leverages a randomized experiment conducted by a large fintech lender to estimate welfare losses arising from asymmetric information in the market for online consumer credit. Building on methods from the insurance literature, we show how exogenous variation in interest rates can be used to estimate borrower demand and lender cost curves and recover implied welfare losses. While asymmetric information generates large equilibrium price distortions, we find only small overall welfare losses, particularly for high-credit-score borrowers.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"117 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127298179","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Lawmakers are building momentum towards codifying our insider trading laws to clarify which kind of trading is illegal. In May 2021, the US House of Representatives passed the Insider Trading Prohibition Act for the second time in two years. In January 2020, a Securities and Exchange Commission sponsored task force on insider trading released a report containing proposed legislation. Both the House Bill and the task force proposal would prohibit trading while in possession of “wrongfully obtained” information and prohibit trades that involve a “wrongful use” of information. This article explains why the concept of “wrongful” trading is too ambiguous to improve insider trading law and explores the requirements of effective legislative reform. For decades, scholars have described insider trading doctrine as mystifying and called for reform. Many explain the confusion by pointing to the stark difference in how enforcement officials and federal courts apply insider trading law. Others argue that the confusion is caused by policymakers failing to choose between fostering efficient markets and fostering fair or equitable markets. This article argues that the conflict between courts and enforcement officials is a symptom of two deeper conceptual problems—one at the doctrinal level and one at the policy level. The doctrinal confusion is more precisely caused by the attempt to simultaneously invoke two conflicting concepts of “fairness.” Fairness meaning consensual transactions, versus fairness meaning transactions in which all parties enjoy equal access to all material information and other economic values. Attempting to simultaneously apply these mutually exclusive notions of fairness has caused a slow and inconsistent conceptual creep, resulting in an incoherent doctrine. The policy confusion is caused by officials relying on economic models that use misidentified theories of “economic efficiency.” Officials describe the policy goal of our insider trading regime as encouraging capital formation in US securities markets and economic growth in general. These goals imply an exclusive commitment to promoting “allocational efficiency”—or maximizing wealth. However, scholars usually rely on the concept of “market efficiency” when evaluating the law and practice of insider trading. The definition of market efficiency relies on assumptions that embody an unacknowledged focus on economic distribution—equalizing wealth. This includes the assumptions that all investors (1) trade at the same price (the correct price) and (2) have equal access to all available information. Conflating these forms of efficiency causes officials to unintentionally oscillate between promoting opaque distribution goals and promoting economic growth. This article recommends clarifying insider trading law by prioritizing one of the two conflicting fairness doctrines and a compatible policy goal. Clarity requires specifying whether consent is a defense against insider trading liability. En
{"title":"How Creepy Concepts Undermine Effective Insider Trading Reform","authors":"K. Douglas","doi":"10.2139/ssrn.3912868","DOIUrl":"https://doi.org/10.2139/ssrn.3912868","url":null,"abstract":"Lawmakers are building momentum towards codifying our insider trading laws to clarify which kind of trading is illegal. In May 2021, the US House of Representatives passed the Insider Trading Prohibition Act for the second time in two years. In January 2020, a Securities and Exchange Commission sponsored task force on insider trading released a report containing proposed legislation. Both the House Bill and the task force proposal would prohibit trading while in possession of “wrongfully obtained” information and prohibit trades that involve a “wrongful use” of information. This article explains why the concept of “wrongful” trading is too ambiguous to improve insider trading law and explores the requirements of effective legislative reform. For decades, scholars have described insider trading doctrine as mystifying and called for reform. Many explain the confusion by pointing to the stark difference in how enforcement officials and federal courts apply insider trading law. Others argue that the confusion is caused by policymakers failing to choose between fostering efficient markets and fostering fair or equitable markets. This article argues that the conflict between courts and enforcement officials is a symptom of two deeper conceptual problems—one at the doctrinal level and one at the policy level. The doctrinal confusion is more precisely caused by the attempt to simultaneously invoke two conflicting concepts of “fairness.” Fairness meaning consensual transactions, versus fairness meaning transactions in which all parties enjoy equal access to all material information and other economic values. Attempting to simultaneously apply these mutually exclusive notions of fairness has caused a slow and inconsistent conceptual creep, resulting in an incoherent doctrine. The policy confusion is caused by officials relying on economic models that use misidentified theories of “economic efficiency.” Officials describe the policy goal of our insider trading regime as encouraging capital formation in US securities markets and economic growth in general. These goals imply an exclusive commitment to promoting “allocational efficiency”—or maximizing wealth. However, scholars usually rely on the concept of “market efficiency” when evaluating the law and practice of insider trading. The definition of market efficiency relies on assumptions that embody an unacknowledged focus on economic distribution—equalizing wealth. This includes the assumptions that all investors (1) trade at the same price (the correct price) and (2) have equal access to all available information. Conflating these forms of efficiency causes officials to unintentionally oscillate between promoting opaque distribution goals and promoting economic growth. This article recommends clarifying insider trading law by prioritizing one of the two conflicting fairness doctrines and a compatible policy goal. Clarity requires specifying whether consent is a defense against insider trading liability. En","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-08-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129068200","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Seraina C. Anagnostopoulou, L. Trigeorgis, A. Tsekrekos
We examine the association between active options market trading and the (in)efficiency of corporate investment in terms of deviation from optimal investment levels. Past research considers the volume of options trading as contributing to firms’ informational efficiency. Investment efficiency is partly driven by information asymmetries between firm managers and capital providers, aggravating moral hazard concerns. We test whether the enhancement in firms’ information environment associated with higher volume of options trading activity is positively related to optimizing investment at the firm level. Our results indicate that the volume of options trading by firms is positively and significantly associated with firm-level investment efficiency. This relation is associated with the enhancement in the firms’ information environment stemming from active options trading and with improved managerial learning from informed traders’ market participation. Overall, our findings suggest that managerial skills and learning associated with active trading in options markets benefit firms’ investment decisions through enhancing the optimal allocation of firm resources and investment efficiency.
{"title":"Options Trading Activity and the Efficiency of Corporate Investment","authors":"Seraina C. Anagnostopoulou, L. Trigeorgis, A. Tsekrekos","doi":"10.2139/ssrn.3788992","DOIUrl":"https://doi.org/10.2139/ssrn.3788992","url":null,"abstract":"We examine the association between active options market trading and the (in)efficiency of corporate investment in terms of deviation from optimal investment levels. Past research considers the volume of options trading as contributing to firms’ informational efficiency. Investment efficiency is partly driven by information asymmetries between firm managers and capital providers, aggravating moral hazard concerns. We test whether the enhancement in firms’ information environment associated with higher volume of options trading activity is positively related to optimizing investment at the firm level. Our results indicate that the volume of options trading by firms is positively and significantly associated with firm-level investment efficiency. This relation is associated with the enhancement in the firms’ information environment stemming from active options trading and with improved managerial learning from informed traders’ market participation. Overall, our findings suggest that managerial skills and learning associated with active trading in options markets benefit firms’ investment decisions through enhancing the optimal allocation of firm resources and investment efficiency.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"72 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-08-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126349337","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Ben Grodeck, Franziska Tausch, Erte Xiao, Chengsi Wang
We design a novel insurance advice mechanism aimed at promoting trust and cooperation in markets with asymmetric information. In a buyer-seller game, sellers are given the option to advise buyers on whether to purchase third-party insurance against the potential losses from the opportunistic behavior of strategic sellers. The theoretical model suggests that both cooperative and strategic sellers will advise buyers not to purchase the insurance. Once this advice has been given, strategic sellers are less likely to pursue self-interest due to the associated psychological costs. We conduct a controlled laboratory experiment and show that the insurance advice mechanism significantly increases market efficiency, with sellers being more likely to cooperate with buyers and buyers being more likely to purchase from the seller. Furthermore, we find that the insurance advice mechanism is more effective when sellers can observe buyers’ insurance purchase decisions.
{"title":"To Insure or Not to Insure? Promoting Trust and Cooperation with Insurance Advice in Markets","authors":"Ben Grodeck, Franziska Tausch, Erte Xiao, Chengsi Wang","doi":"10.2139/ssrn.3892011","DOIUrl":"https://doi.org/10.2139/ssrn.3892011","url":null,"abstract":"We design a novel insurance advice mechanism aimed at promoting trust and cooperation in markets with asymmetric information. In a buyer-seller game, sellers are given the option to advise buyers on whether to purchase third-party insurance against the potential losses from the opportunistic behavior of strategic sellers. The theoretical model suggests that both cooperative and strategic sellers will advise buyers not to purchase the insurance. Once this advice has been given, strategic sellers are less likely to pursue self-interest due to the associated psychological costs. We conduct a controlled laboratory experiment and show that the insurance advice mechanism significantly increases market efficiency, with sellers being more likely to cooperate with buyers and buyers being more likely to purchase from the seller. Furthermore, we find that the insurance advice mechanism is more effective when sellers can observe buyers’ insurance purchase decisions.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"164 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124587897","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate the potential and limits of privacy-preserving corporate blockchain applications for information provision. We provide a theoretical model in which heterogeneous firms choose between adopting a blockchain application or relying on traditional third-party intermediaries to inform the capital market. The blockchain’s ability to generate information depends on each firm’s data profile and all firms’ endogenous adoption decisions. We show that blockchain technology can improve the information environment and outperform traditional institutions with firms’ adoption decisions serving as a credible value signal and the application uncovering firm values by analyzing all participating firms’ data. However, we also characterize an adverse mixed-adoption equilibrium in which neither of the two channels realizes its full potential and information provision declines not only for individual firms, but also in aggregate. The equilibrium is a warning sign that has broad implications for policymakers’ regulatory effort and investors’ assessment of corporate blockchain applications. This paper was accepted by Suraj Srinivasan, accounting. Funding: B. Franke and Q. Gao Fritz gratefully acknowledge financial support from the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) Project-ID 403041268–TRR 266 Accounting for Transparency. A. Stenzel gratefully acknowledges financial support from the DFG through CRC TR 224 (Project C03) during prior employment at the University of Mannheim. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2023.4718 .
{"title":"The (Limited) Power of Blockchain Networks for Information Provision","authors":"Benedikt Franke, Qi Gao Fritz, André Stenzel","doi":"10.2139/ssrn.3475383","DOIUrl":"https://doi.org/10.2139/ssrn.3475383","url":null,"abstract":"We investigate the potential and limits of privacy-preserving corporate blockchain applications for information provision. We provide a theoretical model in which heterogeneous firms choose between adopting a blockchain application or relying on traditional third-party intermediaries to inform the capital market. The blockchain’s ability to generate information depends on each firm’s data profile and all firms’ endogenous adoption decisions. We show that blockchain technology can improve the information environment and outperform traditional institutions with firms’ adoption decisions serving as a credible value signal and the application uncovering firm values by analyzing all participating firms’ data. However, we also characterize an adverse mixed-adoption equilibrium in which neither of the two channels realizes its full potential and information provision declines not only for individual firms, but also in aggregate. The equilibrium is a warning sign that has broad implications for policymakers’ regulatory effort and investors’ assessment of corporate blockchain applications. This paper was accepted by Suraj Srinivasan, accounting. Funding: B. Franke and Q. Gao Fritz gratefully acknowledge financial support from the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) Project-ID 403041268–TRR 266 Accounting for Transparency. A. Stenzel gratefully acknowledges financial support from the DFG through CRC TR 224 (Project C03) during prior employment at the University of Mannheim. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2023.4718 .","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131655085","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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