Markus K. Brunnermeier, R. Lamba, C. Segura-Rodríguez
Big data, machine learning and AI inverts adverse selection problems. It allows insurers to infer statistical information and thereby reverses information advantage from the insuree to the insurer. In a setting with two-dimensional type space whose correlation can be inferred with big data we derive three results: First, a novel tradeoff between a belief gap and price discrimination emerges. The insurer tries to protect its statistical information by offering only a few screening contracts. Second, we show that forcing the insurance company to reveal its statistical information can be welfare improving. Third, we show in a setting with naïve agents that do not perfectly infer statistical information from the price of offered contracts, price discrimination significantly boosts insurer’s profits. We also discuss the significance of our analysis through three stylized facts: the rise of data brokers, the importance of consumer activism and regulatory forbearance, and merits of a public data repository.
{"title":"Inverse Selection","authors":"Markus K. Brunnermeier, R. Lamba, C. Segura-Rodríguez","doi":"10.2139/ssrn.3584331","DOIUrl":"https://doi.org/10.2139/ssrn.3584331","url":null,"abstract":"Big data, machine learning and AI inverts adverse selection problems. It allows insurers to infer statistical information and thereby reverses information advantage from the insuree to the insurer. In a setting with two-dimensional type space whose correlation can be inferred with big data we derive three results: First, a novel tradeoff between a belief gap and price discrimination emerges. The insurer tries to protect its statistical information by offering only a few screening contracts. Second, we show that forcing the insurance company to reveal its statistical information can be welfare improving. Third, we show in a setting with naïve agents that do not perfectly infer statistical information from the price of offered contracts, price discrimination significantly boosts insurer’s profits. We also discuss the significance of our analysis through three stylized facts: the rise of data brokers, the importance of consumer activism and regulatory forbearance, and merits of a public data repository.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"32 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129458788","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 provides empirical evidence of large welfare losses associated with asymmetric information about product quality in a competitive market. When consumers cannot observe product characteristics at the time of purchase, atomistic producers have no incentive to supply costly quality. We compare wine prices across administrative districts around the enactment of historic regulations aimed at certifying the quality of more than 250 French appellation wines to identify welfare losses from asymmetric information. We estimate that these losses represent up to 13% of total market value, suggesting an important role for credible certification schemes.
{"title":"How Big is the “Lemons” Problem? Historical Evidence from French Wines","authors":"P. Mérel, Ariel Ortiz-Bobea, Emmanuel Paroissien","doi":"10.2139/ssrn.3444625","DOIUrl":"https://doi.org/10.2139/ssrn.3444625","url":null,"abstract":"This paper provides empirical evidence of large welfare losses associated with asymmetric information about product quality in a competitive market. When consumers cannot observe product characteristics at the time of purchase, atomistic producers have no incentive to supply costly quality. We compare wine prices across administrative districts around the enactment of historic regulations aimed at certifying the quality of more than 250 French appellation wines to identify welfare losses from asymmetric information. We estimate that these losses represent up to 13% of total market value, suggesting an important role for credible certification schemes.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"73 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129495515","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}
Social distancing --- which is critical for mitigating the spread of COVID-19 --- has been slow and inadequate. Applying the literature on beauty contest models, we show: (1) When a new and rare virus, like COVID-19, emerges, the aggregate level of social distancing has inherent inertia. Novel infectious diseases abruptly change the appropriate level of social distancing, leaving individuals uncertain about how to act. Inertia arises because individuals care about conforming to social norms (e.g., it is awkward to refuse a social invitation or work request) and the common knowledge about the past norm of social distancing help individuals coordinate behavior. (2) Clear national public statements are essential in reducing that inertia and adjusting the public's behavior to the new, optimal level of social distancing. Such national statements enable individuals and communities to coordinate on new norms of behavior, reducing inertia and moving the society closer to the optimum. They generate a beneficial over-reaction from the public that helps offset the over-weighting of past experience. (3) National communication is better than local communication when optimal social distancing levels are highly correlated over-time and when individuals are poorly-informed, so that the overweighting of prior social distancing norms is more severe.
{"title":"Coordination and Social Distancing: Inertia in the Aggregate Response to COVID-19","authors":"Mehdi Shadmehr, Ethan Bueno de Mesquita","doi":"10.2139/ssrn.3568535","DOIUrl":"https://doi.org/10.2139/ssrn.3568535","url":null,"abstract":"Social distancing --- which is critical for mitigating the spread of COVID-19 --- has been slow and inadequate. Applying the literature on beauty contest models, we show: (1) When a new and rare virus, like COVID-19, emerges, the aggregate level of social distancing has inherent inertia. Novel infectious diseases abruptly change the appropriate level of social distancing, leaving individuals uncertain about how to act. Inertia arises because individuals care about conforming to social norms (e.g., it is awkward to refuse a social invitation or work request) and the common knowledge about the past norm of social distancing help individuals coordinate behavior. (2) Clear national public statements are essential in reducing that inertia and adjusting the public's behavior to the new, optimal level of social distancing. Such national statements enable individuals and communities to coordinate on new norms of behavior, reducing inertia and moving the society closer to the optimum. They generate a beneficial over-reaction from the public that helps offset the over-weighting of past experience. (3) National communication is better than local communication when optimal social distancing levels are highly correlated over-time and when individuals are poorly-informed, so that the overweighting of prior social distancing norms is more severe.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"140 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131498900","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}
Janina Knappstein, Marco Muschallik, Andrew P. Schmidt
Based on the ongoing disclosure overload debate, this paper investigates how deregulation-driven decreases in quarterly disclosure affect information asymmetry. We exploit a German setting in which the minimum content requirements for quarterly reporting have been reduced for firms listed in the Prime Standard segment of the Frankfurt Stock Exchange (FSE). This deregulation allows Prime Standard companies to choose whether to continue to publish full quarterly financial reports or to switch to so-called quarterly statements to meet their quarterly reporting obligations. Compared to full quarterly reports, the latter have significantly lower minimum content requirements. Based on a difference-in-differences research design, our results provide empirical evidence that decreases in quarterly disclosure come along with statistically and economically significant increases in information asymmetry. However, we find that this effect is particularly driven by smaller firms, which operate in weaker information environments. Additionally, our results confirm that this information asymmetry effect is associated with the extent of actual decreases in (specific content-related types of) quarterly disclosure.
{"title":"Information Asymmetry Effects of Deregulation-Driven Decreases in Quarterly Financial Disclosure - Evidence from Germany","authors":"Janina Knappstein, Marco Muschallik, Andrew P. Schmidt","doi":"10.2139/ssrn.3278236","DOIUrl":"https://doi.org/10.2139/ssrn.3278236","url":null,"abstract":"Based on the ongoing disclosure overload debate, this paper investigates how deregulation-driven decreases in quarterly disclosure affect information asymmetry. We exploit a German setting in which the minimum content requirements for quarterly reporting have been reduced for firms listed in the Prime Standard segment of the Frankfurt Stock Exchange (FSE). This deregulation allows Prime Standard companies to choose whether to continue to publish full quarterly financial reports or to switch to so-called quarterly statements to meet their quarterly reporting obligations. Compared to full quarterly reports, the latter have significantly lower minimum content requirements. Based on a difference-in-differences research design, our results provide empirical evidence that decreases in quarterly disclosure come along with statistically and economically significant increases in information asymmetry. However, we find that this effect is particularly driven by smaller firms, which operate in weaker information environments. Additionally, our results confirm that this information asymmetry effect is associated with the extent of actual decreases in (specific content-related types of) quarterly disclosure.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115601886","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 study a dynamic contracting problem in which the principal can allocate his limited capacity between seeking evidence that confirms or that contradicts the agent's effort, as the basis for reward or punishment. Such flexibility calls for jointly designed monitoring and compensation schemes practically relevant but novel in the literature. When the agent's continuation value is low, the principal seeks only confirmatory evidence, but when the agent's continuation value exceeds a threshold, the principal switches to seeking mainly contradictory evidence. Moreover, the agent's effort can be perpetuated if and only if both synergy and flexibility in monitoring are sufficiently large.
{"title":"Dynamic Contracting with Flexible Monitoring","authors":"Liang Dai, Yenan Wang, Ming-yu Yang","doi":"10.2139/ssrn.3496785","DOIUrl":"https://doi.org/10.2139/ssrn.3496785","url":null,"abstract":"We study a dynamic contracting problem in which the principal can allocate his limited capacity between seeking evidence that confirms or that contradicts the agent's effort, as the basis for reward or punishment. Such flexibility calls for jointly designed monitoring and compensation schemes practically relevant but novel in the literature. When the agent's continuation value is low, the principal seeks only confirmatory evidence, but when the agent's continuation value exceeds a threshold, the principal switches to seeking mainly contradictory evidence. Moreover, the agent's effort can be perpetuated if and only if both synergy and flexibility in monitoring are sufficiently large.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"85 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"113981304","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 Bundling credit with insurance contracts is a common approach to increasing insurance take-up, especially in low income-environments. I document that this approach can induce adverse selection in insurance; thus, acting as an important source of inefficiency.
{"title":"Does Bundling Induce Adverse Selection in Insurance?","authors":"Francis Annan","doi":"10.2139/ssrn.3611230","DOIUrl":"https://doi.org/10.2139/ssrn.3611230","url":null,"abstract":"Abstract Bundling credit with insurance contracts is a common approach to increasing insurance take-up, especially in low income-environments. I document that this approach can induce adverse selection in insurance; thus, acting as an important source of inefficiency.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"107 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124959460","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}
Online crowdfunding platforms enable entrepreneurs and investors to interact with fewer geographic constraints and have become an important financing alternative for (micro-)entrepreneurship. However, local preference and information frictions could lead investors to overly focus on local projects, even when the non-local options are equally (if not more) attractive. This paper investigates the existence of local biases and the channels through which they are induced in crowdfunding marketplaces. We present empirical evidence consistent with strong local biases among investors. We also quantify the importance of information asymmetry and preference toward local projects on inducing local biases, and find that information asymmetry accounts for two-thirds of the total effect. Our results suggest that providing information about the projects through marketing might be a more efficient way to raise funds for micro-entrepreneurship as it mitigates non-local investors' informational disadvantages.
{"title":"Financing Micro-entrepreneurship in Online Crowdfunding Markets: Local Preference versus Information Frictions","authors":"Jian Ni, Yi Xin","doi":"10.2139/ssrn.3580585","DOIUrl":"https://doi.org/10.2139/ssrn.3580585","url":null,"abstract":"Online crowdfunding platforms enable entrepreneurs and investors to interact with fewer geographic constraints and have become an important financing alternative for (micro-)entrepreneurship. However, local preference and information frictions could lead investors to overly focus on local projects, even when the non-local options are equally (if not more) attractive. This paper investigates the existence of local biases and the channels through which they are induced in crowdfunding marketplaces. We present empirical evidence consistent with strong local biases among investors. We also quantify the importance of information asymmetry and preference toward local projects on inducing local biases, and find that information asymmetry accounts for two-thirds of the total effect. Our results suggest that providing information about the projects through marketing might be a more efficient way to raise funds for micro-entrepreneurship as it mitigates non-local investors' informational disadvantages.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130509754","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}
Antonio Gargano, Juan M. Sotes-Paladino, P. Verwijmeren
We provide evidence that losses constrain short sellers but not the transmission of information to prices. Using unique data on U.S. equity lending, we document a negative impact of the mark-to-market losses of a stock's short sellers, but no impact of their gains, on the future shorting of the stock. Consistent with funding and institutional constraints limiting short selling, we further show that the effect is highly asymmetric across different loss levels and stronger among stocks facing higher margin requirements. However, loss-making short selling has no predictive power for returns, suggesting a low impact of these constraints on the transmission of short sellers’ information to prices.
{"title":"Short of capital: Stock Market Implications of Short Sellers’ Losses","authors":"Antonio Gargano, Juan M. Sotes-Paladino, P. Verwijmeren","doi":"10.2139/ssrn.3326332","DOIUrl":"https://doi.org/10.2139/ssrn.3326332","url":null,"abstract":"We provide evidence that losses constrain short sellers but not the transmission of information to prices. Using unique data on U.S. equity lending, we document a negative impact of the mark-to-market losses of a stock's short sellers, but no impact of their gains, on the future shorting of the stock. Consistent with funding and institutional constraints limiting short selling, we further show that the effect is highly asymmetric across different loss levels and stronger among stocks facing higher margin requirements. However, loss-making short selling has no predictive power for returns, suggesting a low impact of these constraints on the transmission of short sellers’ information to prices.<br>","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"160 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129245739","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 the amount of information disclosure in a reputation system that optimizes the platform’s profit.
本文研究了信誉系统中信息披露的数量对平台利润的影响。
{"title":"Design of Platform Reputation Systems: Optimal Information Disclosure","authors":"Z. Shi, K. Srinivasan, Kaifu Zhang","doi":"10.2139/ssrn.3557086","DOIUrl":"https://doi.org/10.2139/ssrn.3557086","url":null,"abstract":"This paper studies the amount of information disclosure in a reputation system that optimizes the platform’s profit.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115460899","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}
Legislation lags behind technology all too often. While trillions of dollars are exchanged in online transactions—safely, cheaply, and instantaneously—workers still must wait two weeks to a month to receive payments from their employers. In the modern economy, workers are effectively lending money to their employers, as they wait for earned wages to be paid.
The same worker who taps a credit card to pay for groceries in semi-automated checkout lines depends on dated payroll systems that only transfer payments on a “payday.” Workers, especially those living paycheck-to-paycheck, are hard-pressed to meet their daily needs and turn to expensive, short-term credit products—notably, payday lenders. While the need for credit is a real one, credit providers charge a steep price, often culminating in endless debt spirals. So, why does the payday still exist?
This Article studies various explanations—economic, historical, behavioral, and legal. A primary conclusion is that the payday owes its existence to legacy legal architecture. That is, payday is a software problem, not a hardware problem. The hardware—i.e., money and payroll technology—is here. We can pay workers daily; in fact, gig economy workers in developing countries will often be paid more quickly than an American employee for the same work. What holds us back is our legal software: Dated Eisenhower-era legislation that failed to anticipate technological change. Surprisingly, even pro-worker legislation, such as minimum wage laws, inadvertently encourage the practice.
By revealing the overlooked and dated legal infrastructure that sustains the payday, the Article suggests a path for legal reform. Daily streams of payment to workers are feasible, practical, and far more efficient than most people realize. A focused reform could effectively bring an end to the puzzling and pernicious practice of having workers lend money to their employers while they wait for their payday.
{"title":"Payday","authors":"Yonathan A. Arbel","doi":"10.2307/j.ctt14jxrkx.14","DOIUrl":"https://doi.org/10.2307/j.ctt14jxrkx.14","url":null,"abstract":"Legislation lags behind technology all too often. While trillions of dollars are exchanged in online transactions—safely, cheaply, and instantaneously—workers still must wait two weeks to a month to receive payments from their employers. In the modern economy, workers are effectively lending money to their employers, as they wait for earned wages to be paid.<br><br>The same worker who taps a credit card to pay for groceries in semi-automated checkout lines depends on dated payroll systems that only transfer payments on a “payday.” Workers, especially those living paycheck-to-paycheck, are hard-pressed to meet their daily needs and turn to expensive, short-term credit products—notably, payday lenders. While the need for credit is a real one, credit providers charge a steep price, often culminating in endless debt spirals. So, why does the payday still exist?<br><br>This Article studies various explanations—economic, historical, behavioral, and legal. A primary conclusion is that the payday owes its existence to legacy legal architecture. That is, payday is a software problem, not a hardware problem. The hardware—i.e., money and payroll technology—is here. We can pay workers daily; in fact, gig economy workers in developing countries will often be paid more quickly than an American employee for the same work. What holds us back is our legal software: Dated Eisenhower-era legislation that failed to anticipate technological change. Surprisingly, even pro-worker legislation, such as minimum wage laws, inadvertently encourage the practice.<br><br>By revealing the overlooked and dated legal infrastructure that sustains the payday, the Article suggests a path for legal reform. Daily streams of payment to workers are feasible, practical, and far more efficient than most people realize. A focused reform could effectively bring an end to the puzzling and pernicious practice of having workers lend money to their employers while they wait for their payday.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"738 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123860793","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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