Long-Term Contracts, Commitment, and Optimal Information Disclosure

Alessandro Dovis and Paolo Martellini

No 33051, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies optimal information disclosure in dynamic insurance economies with income risk in which an incumbent firm acquires more information about a consumer's persistent type than the rest of the market does. We find that if the incumbent can commit to long-term contracts but the consumer can walk away, the optimal disclosure prescribes no information revelation to maximize cross-subsidization. However, if the incumbent lacks commitment, no cross-subsidization of low-income consumers is feasible for any public information disclosure because of adverse selection. We show that partial information disclosure is typically optimal and it aims at implementing intertemporal consumption smoothing between the first period and the high-state in the second period, generating an inverse of the back-loading result in Harris and Holmstrom (1982). Lastly, we show that, without commitment, banning long-term relations can be beneficial to consumers. Our results can be used to analyze the consequences of policy proposals such as open banking and consumer data ownership.

JEL-codes: E0 (search for similar items in EconPapers)
Date: 2024-10
New Economics Papers: this item is included in nep-acc, nep-cta and nep-mic
Note: EFG
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