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Hard evidence and welfare in adverse selection environments

Kym Pram

No MWP 2017/10, Economics Working Papers from European University Institute

Abstract: I consider environments in which an agent with private information can acquire arbitrary hard evidence about his type before interacting with a principal. In a broad class of screening models, I show that there is always an evidence structure that interim Pareto improves over the no-evidence benchmark whenever some types of the agent take an outside option in the benchmark case, and additional weak conditions, including either a single-crossing condition or state-independence of the principal's payoffs, are satisfied. I show that the sufficient conditions are tight and broadly applicable. Addressing concerns about multiple equilibria, I show how a planner can restrict the available evidence to ensure that an equilibrium which interim Pareto-improves over the benchmark case is obtained. Furthermore, I show that Pareto-improving evidence can arise endogenously when agents choose what evidence to acquire (and disclose).

Keywords: Information Economics; Hard Evidence; Mechanism Design; Microeconomic Theory; Insurance. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-des and nep-mic
Date: 2017
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