Peer-to-peer (P2P) lending became a global phenomenon in recent years. Despite their prominence in the “FinTech” era, P2P platforms remain a risky investment because of the high default rate of unsecured personal loans funded on such platforms. In contrast, the rate of return can be much higher than that of other investments if P2P loans are repaid. Therefore, investors of P2P loans need information about borrowers’ ability to repay. An important channel is to learn from other investors who may have information advantages. We argue that, because collective effort from investors is required in P2P lending, it could be optimal for informed investors to bid early in projects with the purpose of signaling the quality. With a unique data set from Prosper.com, we find that informed investors are indeed more likely to bid in the early stage of a project with a low probability of being funded, whereas uninformed investors will follow. The “squatting” behavior (early bidding) of informed investors facilitates information spillover to uninformed investors, benefitting the investors and borrowers who otherwise may not raise sufficient funding. Our findings also have implications for P2P lending platforms on how to manage the information asymmetry and strategic behaviors of investors.
{"title":"Information Asymmetry among Investors and Strategic Bidding in Peer-to-Peer Lending","authors":"Kai Lu, Zaiyan Wei, T. Chan","doi":"10.2139/ssrn.3403211","DOIUrl":"https://doi.org/10.2139/ssrn.3403211","url":null,"abstract":"Peer-to-peer (P2P) lending became a global phenomenon in recent years. Despite their prominence in the “FinTech” era, P2P platforms remain a risky investment because of the high default rate of unsecured personal loans funded on such platforms. In contrast, the rate of return can be much higher than that of other investments if P2P loans are repaid. Therefore, investors of P2P loans need information about borrowers’ ability to repay. An important channel is to learn from other investors who may have information advantages. We argue that, because collective effort from investors is required in P2P lending, it could be optimal for informed investors to bid early in projects with the purpose of signaling the quality. With a unique data set from Prosper.com, we find that informed investors are indeed more likely to bid in the early stage of a project with a low probability of being funded, whereas uninformed investors will follow. The “squatting” behavior (early bidding) of informed investors facilitates information spillover to uninformed investors, benefitting the investors and borrowers who otherwise may not raise sufficient funding. Our findings also have implications for P2P lending platforms on how to manage the information asymmetry and strategic behaviors of investors.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-06-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129073669","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 study assesses the causal effect of the inefficiency of the judicial system on the delay in the execution of public contracts. We apply a border-discontinuity design that leverages the variation in the length of civil proceedings across Italian jurisdictions and a granular dataset of public contracts. Using a quantile regression approach, we uncover a non-linear effect of court inefficiency: slow courts lead to further delay for long-overdue contracts, and to less delay for works that are on track (or short-overdue). We argue that these results are consistent with a setting in which inefficient judiciaries have opposite effects on contractors’ expected gains from suing the contracting authority depending on the extent of the delay in delivering the contract.
{"title":"Delays at the Border: Court Efficiency and Delays in Public Contracts","authors":"F. Decarolis, Gianpiero Mattera, C. Menon","doi":"10.2139/ssrn.3744074","DOIUrl":"https://doi.org/10.2139/ssrn.3744074","url":null,"abstract":"This study assesses the causal effect of the inefficiency of the judicial system on the delay in the execution of public contracts. We apply a border-discontinuity design that leverages the variation in the length of civil proceedings across Italian jurisdictions and a granular dataset of public contracts. Using a quantile regression approach, we uncover a non-linear effect of court inefficiency: slow courts lead to further delay for long-overdue contracts, and to less delay for works that are on track (or short-overdue). We argue that these results are consistent with a setting in which inefficient judiciaries have opposite effects on contractors’ expected gains from suing the contracting authority depending on the extent of the delay in delivering the contract.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"214 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123862287","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}
In recent years, the rapid development of online marketplaces has not only given rise to co-opetitive relationships between sellers but also to information asymmetry between online marketplaces and sellers. This paper studies information sharing in an e-commerce setting consisting of an online marketplace, an upstream manufacturer and a reseller, where the online marketplace possesses superior demand information while the manufacturer and reseller engage in a co-opetitive structure. The reseller procures the products from the manufacturer under a wholesale price contract, and both the manufacturer and the reseller sell the products through the online marketplace by paying a proportional commission fee. We examine the online marketplace's four information-sharing strategies: no information sharing (S1), full information sharing (S2), and partial information sharing with the manufacturer (S3) or with the reseller (S4). Our analysis shows that when the intensity of competition between the manufacturer and reseller is relatively low and the demand variability is moderate, the online marketplace should adopt full information sharing; otherwise, it will prefer to share its demand information with the manufacturer only. Moreover, interestingly, we find that the manufacturer always prefers the scenario of full information sharing to the scenario that endows it with an informational advantage against the reseller. By contrast, the reseller never prefers full information sharing. Depending on the competitive intensity and demand variability, the reseller will either prefer the scenario in which the online marketplace shares the demand information with it only or the scenario in which demand information is shared with the manufacturer only. The rationale for these results hinges on the interactions of the signaling cost, the efficiency effect, and the co-opetitive relationship between the manufacturer and the reseller.
{"title":"Information Sharing in an Online Marketplace with Co-opetitive Sellers","authors":"Guo Li, Hong Zheng, Lin Tian","doi":"10.1111/POMS.13460","DOIUrl":"https://doi.org/10.1111/POMS.13460","url":null,"abstract":"In recent years, the rapid development of online marketplaces has not only given rise to co-opetitive relationships between sellers but also to information asymmetry between online marketplaces and sellers. This paper studies information sharing in an e-commerce setting consisting of an online marketplace, an upstream manufacturer and a reseller, where the online marketplace possesses superior demand information while the manufacturer and reseller engage in a co-opetitive structure. The reseller procures the products from the manufacturer under a wholesale price contract, and both the manufacturer and the reseller sell the products through the online marketplace by paying a proportional commission fee. We examine the online marketplace's four information-sharing strategies: no information sharing (S1), full information sharing (S2), and partial information sharing with the manufacturer (S3) or with the reseller (S4). Our analysis shows that when the intensity of competition between the manufacturer and reseller is relatively low and the demand variability is moderate, the online marketplace should adopt full information sharing; otherwise, it will prefer to share its demand information with the manufacturer only. Moreover, interestingly, we find that the manufacturer always prefers the scenario of full information sharing to the scenario that endows it with an informational advantage against the reseller. By contrast, the reseller never prefers full information sharing. Depending on the competitive intensity and demand variability, the reseller will either prefer the scenario in which the online marketplace shares the demand information with it only or the scenario in which demand information is shared with the manufacturer only. The rationale for these results hinges on the interactions of the signaling cost, the efficiency effect, and the co-opetitive relationship between the manufacturer and the reseller.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"74 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115962843","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}
Risk is an important earnings attribute in valuation models and the FASB’s conceptual framework identifies providing information about risk as a primary objective for earnings. Managers and analysts, however, state that they provide non-GAAP earnings to produce numbers that are more focused on core or cash-based earnings components. They do not discuss risk-relevance as a motivation. We ask whether, by focusing on one earnings attribute (core earnings), non-GAAP earnings sacrifice another important earnings attribute (risk-relevance). We find that non-GAAP earnings capture the more risk-relevant components of GAAP earnings, although non-GAAP exclusions are not risk-irrelevant. Further, not only do non-GAAP earnings better capture information about current risk, they also provide more information about future firm risk. Finally, when comparing exclusion types, we find that special item exclusions contain more risk-relevant information than other item exclusions. Overall, we conclude that in constructing non-GAAP earnings to better capture core earnings, non-GAAP earnings also provide investors with a more risk-focused earnings construct.
{"title":"The Risk-Relevance of Street Earnings","authors":"Frank Heflin, K. Kolev, Benjamin C. Whipple","doi":"10.2139/ssrn.3222893","DOIUrl":"https://doi.org/10.2139/ssrn.3222893","url":null,"abstract":"Risk is an important earnings attribute in valuation models and the FASB’s conceptual framework identifies providing information about risk as a primary objective for earnings. Managers and analysts, however, state that they provide non-GAAP earnings to produce numbers that are more focused on core or cash-based earnings components. They do not discuss risk-relevance as a motivation. We ask whether, by focusing on one earnings attribute (core earnings), non-GAAP earnings sacrifice another important earnings attribute (risk-relevance). We find that non-GAAP earnings capture the more risk-relevant components of GAAP earnings, although non-GAAP exclusions are not risk-irrelevant. Further, not only do non-GAAP earnings better capture information about current risk, they also provide more information about future firm risk. Finally, when comparing exclusion types, we find that special item exclusions contain more risk-relevant information than other item exclusions. Overall, we conclude that in constructing non-GAAP earnings to better capture core earnings, non-GAAP earnings also provide investors with a more risk-focused earnings construct.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123921149","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 develop a model to explain the value and consequences of investment screens, which are commonly employed by sophisticated investors. In the model, some stock-market investors are uncertain about the quality of private information before they acquire it and, in equilibrium, rationally use prior prices and public information as a screen to predict the returns from information acquisition. We find that larger price surprises lead to more information acquisition, which implies higher future price volatility and trading volumes. We also highlight the determinants of the equilibrium value of investment screens, such as informed trade, noise trade, and public information.
{"title":"A Theory of Rational Investment Screens","authors":"Paul E. Fischer, M. Heinle","doi":"10.2139/ssrn.3644532","DOIUrl":"https://doi.org/10.2139/ssrn.3644532","url":null,"abstract":"We develop a model to explain the value and consequences of investment screens, which are commonly employed by sophisticated investors. In the model, some stock-market investors are uncertain about the quality of private information before they acquire it and, in equilibrium, rationally use prior prices and public information as a screen to predict the returns from information acquisition. We find that larger price surprises lead to more information acquisition, which implies higher future price volatility and trading volumes. We also highlight the determinants of the equilibrium value of investment screens, such as informed trade, noise trade, and public information.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128927265","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 consider a firm that faces a potential disruption in its normal operations can purchase business interruption (BI) insurance from an insurer to guard against the disruption risk. The firm makes demand forecasts and can put a recovery effort if a disruption occurs; both are unobservable to the insurer. Accordingly, the insurer offers BI insurance to the firm while facing adverse selection and moral hazard. We first find that, because of the joint effect of limited production capacity and self-impelled recovery effort, the firm with a lower demand forecast benefits more from BI insurance than that with a higher demand forecast. Anticipating a higher premium, the low-demand firm has an incentive to pretend to have the higher demand forecast to obtain more profit. We then derive the optimal insurance contracts to deal with the information asymmetry and show how the firm’s characteristics affect the optimal contracts. Both high- and low-demand contracts are affected by the firm’s operational characteristics in the same direction, and the informational characteristics impact those contracts differently. We also analyze the case in which the firm can choose its initial capacity and find that, from the firm’s perspective, capacity and BI insurance could be either substitutes or complements. This paper was accepted by Vishal Gaur, operations management.
{"title":"Impact of Information Asymmetry and Limited Production Capacity on Business Interruption Insurance","authors":"Yuan-Mao Kao, N. B. Keskin, Kevin H. Shang","doi":"10.2139/ssrn.3184530","DOIUrl":"https://doi.org/10.2139/ssrn.3184530","url":null,"abstract":"We consider a firm that faces a potential disruption in its normal operations can purchase business interruption (BI) insurance from an insurer to guard against the disruption risk. The firm makes demand forecasts and can put a recovery effort if a disruption occurs; both are unobservable to the insurer. Accordingly, the insurer offers BI insurance to the firm while facing adverse selection and moral hazard. We first find that, because of the joint effect of limited production capacity and self-impelled recovery effort, the firm with a lower demand forecast benefits more from BI insurance than that with a higher demand forecast. Anticipating a higher premium, the low-demand firm has an incentive to pretend to have the higher demand forecast to obtain more profit. We then derive the optimal insurance contracts to deal with the information asymmetry and show how the firm’s characteristics affect the optimal contracts. Both high- and low-demand contracts are affected by the firm’s operational characteristics in the same direction, and the informational characteristics impact those contracts differently. We also analyze the case in which the firm can choose its initial capacity and find that, from the firm’s perspective, capacity and BI insurance could be either substitutes or complements. This paper was accepted by Vishal Gaur, operations management.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"329 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116002523","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}
Transparent disclosures of public information might be one natural policy to reduce information inequality among individuals. We conduct a welfare analysis of such policy by introducing ex-ante heterogeneity in individuals' private information in a class of economies with dispersed information and externalities. We find that, paradoxically, welfare unambiguously increases when information inequality widens through greater precision of private information for the already informationally-rich individuals. We also show that the greater the information inequality, the more likely that public information reduces welfare. Our findings suggest caution in making information policies that aim to narrow informational gap with better public information.
{"title":"Information Inequality and Role of Public Information","authors":"Jin Yeub Kim, Myungkyu Shim","doi":"10.2139/ssrn.3566812","DOIUrl":"https://doi.org/10.2139/ssrn.3566812","url":null,"abstract":"Transparent disclosures of public information might be one natural policy to reduce information inequality among individuals. We conduct a welfare analysis of such policy by introducing ex-ante heterogeneity in individuals' private information in a class of economies with dispersed information and externalities. We find that, paradoxically, welfare unambiguously increases when information inequality widens through greater precision of private information for the already informationally-rich individuals. We also show that the greater the information inequality, the more likely that public information reduces welfare. Our findings suggest caution in making information policies that aim to narrow informational gap with better public information.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127857341","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}
There are objects of different quality to be assigned to agents. Agents can be assigned at most one object and there are not enough high quality objects for every agent. The social planner is unable to use transfers to give incentives for agents to convey their private information; instead, she is able to imperfectly verify their reports. We characterize a mechanism that maximizes welfare, where agents face different lotteries over the various objects, depending on their report. We then apply our main result to the case of college admissions. We find that optimal mechanisms are, in general, ex-post inefficient and do strictly better than the standard mechanisms that are typically studied in the matching literature.
{"title":"Optimal Object Assignment Mechanisms With Imperfect Type Verification","authors":"J. Pereyra, Francisco Silva","doi":"10.2139/ssrn.3581442","DOIUrl":"https://doi.org/10.2139/ssrn.3581442","url":null,"abstract":"There are objects of different quality to be assigned to agents. Agents can be assigned at most one object and there are not enough high quality objects for every agent. The social planner is unable to use transfers to give incentives for agents to convey their private information; instead, she is able to imperfectly verify their reports. We characterize a mechanism that maximizes welfare, where agents face different lotteries over the various objects, depending on their report. We then apply our main result to the case of college admissions. We find that optimal mechanisms are, in general, ex-post inefficient and do strictly better than the standard mechanisms that are typically studied in the matching literature.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"101 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126243950","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 offer a model in which heterogeneous agents make individual decisions with negative external effects such as the extent of social distancing during pandemics. Because of the externality, the agents have different individual and political preferences over the policy response. Personally, they might prefer a low-level response, yet would vote for a higher one because it deters the others - even if simultaneously decreasing their personal benefits. The effect is even more pronounced in information acquisition: agents would want one level of slant in the information they base their actions on and a different level of slant in public announcements. The model accounts for numerous empirical regularities of the public response to COVID-19.
{"title":"Political Economy of Crisis Response","authors":"A. Gitmez, K. Sonin, Austin L. Wright","doi":"10.2139/SSRN.3604320","DOIUrl":"https://doi.org/10.2139/SSRN.3604320","url":null,"abstract":"We offer a model in which heterogeneous agents make individual decisions with negative external effects such as the extent of social distancing during pandemics. Because of the externality, the agents have different individual and political preferences over the policy response. Personally, they might prefer a low-level response, yet would vote for a higher one because it deters the others - even if simultaneously decreasing their personal benefits. The effect is even more pronounced in information acquisition: agents would want one level of slant in the information they base their actions on and a different level of slant in public announcements. The model accounts for numerous empirical regularities of the public response to COVID-19.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124674978","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}
Abstract This paper studies welfare maximizing allocation of indivisible objects to ex-ante identical agents in the absence of monetary transfers. The agents, each with a unit demand, share a common ranking of the objects, and are privately informed about their own valuations. The structure of the optimal allocation policy depends on the agents’ relative valuation of the objects and the variation of this relative valuation across different types. When this variation is small, the required loss of welfare for eliciting agents’ private information exceeds its benefits. In this case, evenly randomized allocation is optimal. When this variation is significantly large, it is optimal to waste the less preferred object—not always allocate it to agents—to provide necessary incentives for information elicitation. The planner then uses this information to increase the frequency of allocating the more preferred object to the agent favored by the first best policy. Regardless of the size of the variation, it is never optimal to waste the more preferred object. We also propose an exchange game that implements the incentive efficient allocation.
{"title":"Welfare Maximizing Allocation Without Transfers","authors":"M. Dogan, M. Uyanik","doi":"10.2139/ssrn.3586246","DOIUrl":"https://doi.org/10.2139/ssrn.3586246","url":null,"abstract":"Abstract This paper studies welfare maximizing allocation of indivisible objects to ex-ante identical agents in the absence of monetary transfers. The agents, each with a unit demand, share a common ranking of the objects, and are privately informed about their own valuations. The structure of the optimal allocation policy depends on the agents’ relative valuation of the objects and the variation of this relative valuation across different types. When this variation is small, the required loss of welfare for eliciting agents’ private information exceeds its benefits. In this case, evenly randomized allocation is optimal. When this variation is significantly large, it is optimal to waste the less preferred object—not always allocate it to agents—to provide necessary incentives for information elicitation. The planner then uses this information to increase the frequency of allocating the more preferred object to the agent favored by the first best policy. Regardless of the size of the variation, it is never optimal to waste the more preferred object. We also propose an exchange game that implements the incentive efficient allocation.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"104 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122342652","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}