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Asymmetric Information and Adverse Selection

Ian Jewitt, Clare Leaver and Heski Bar-Isaac ()

No 695, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: This paper develops a framework for the analysis of how asymmetric information impacts on adverse selection and market efficiency. We adopt Akerlof's (1970) unit-demand model extended to a setting with multidimensional public and private information. Adverse selection and efficiency are defined quantitatively as real valued random variables. We characterize how public information disclosure and private information acquisition affect the relationship between adverse selection and efficiency. These results are applied to inform welfare and empirical analysis and, in an employer learning setting, to study the endogenous choice of information structures. Equilibrium information structures impose adverse selection efficiently. We show that this makes adverse selection hard to detect using standard positive correlation tests.

Keywords: asymmetric information; adverse selection; information structures; information acquisition; information disclosure; employer learning (search for similar items in EconPapers)
JEL-codes: D82 J30 (search for similar items in EconPapers)
Date: 2014-01-24
New Economics Papers: this item is included in nep-com, nep-cta, nep-ger and nep-mic
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