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Adverse Selection and Endogeous Information
This paper studies adverse selection markets in which consumers can choose to learn how much they value a product. Information is acquired after observing prices, so it is endogenous. This presents a trade-off: information increases the quality of consumers’ choices but worsens selection. We characterize how this trade-off translates into distortions of consumers’ demand and producers’ cost. We show that information decisions produce a negative externality, may decrease welfare, and may lead to new forms of market breakdown. Moreover, efficiency is typically non-monotone in information costs. Two implications are that (1) standard measures underestimate the welfare costs of adverse selection; and (2) information policies can help correct its inefficiencies. Finally, we construct an empirical test to detect endogenous information in the data, and develop a framework for counterfactual policy analysis.
Date:
23 February 2024, 14:15
Venue:
Manor Road Building, Manor Road OX1 3UQ
Venue Details:
Seminar Room G or https://zoom.us/j/93867615769?pwd=T1NsTEVwNE40R3pEVW9yTlBicG1mdz09
Speaker:
João Thereze (Duke's Fuqua School of Business)
Organising department:
Department of Economics
Part of:
Nuffield Economic Theory Seminar
Booking required?:
Not required
Audience:
Members of the University only
Editors:
Shreyasi Banerjee,
Edward Valenzano
