Journal article
Adverse selection, efficiency and the structure of information
- Abstract:
- This paper explores how the structure of asymmetric information impacts on economic outcomes in Akerlof’s (Q J Econ 84(3):488–500, 1970) Lemons model applied to the labour market and extended to admit a matching component between worker and firm. We characterize the nature of equilibrium and define measures of adverse selection and efficiency. We then characterize the joint distribution of outcomes—adverse selection, probability of trade, efficiency, profits, and wage—for the class of Gaussian basic games and information, and perform comparative statics with respect to a parsimonious parameterization of the information structure. We use this framework to revisit the classic issue, first addressed by Roy (Oxford Econ Pap 3(2):135-146, 1951), of selection into different sectors. We identify conditions under which an effect reversal—adverse selection at any realisation of public information but, overall, positive selection into the outside sector—can and cannot arise, and note the implications for empirical work. We also explore the divisions of expected total surplus between worker and firm that can be achieved as information varies. We show that, if the distribution of worker types is non-singular, any point in the set of possible surplus divisions can be achieved as a limit of a PBE for some information structure with asymmetric information. Finally, re-interpreting the model in an insurance context, where the matching component becomes consumer risk aversion, we use our framework to highlight sources of advantageous selection.
- Publication status:
- Published
- Peer review status:
- Peer reviewed
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(Preview, Version of record, 715.7KB, Terms of use)
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- Publisher copy:
- 10.1007/s00199-020-01300-1
Authors
- Publisher:
- Springer
- Journal:
- Economic Theory More from this journal
- Volume:
- 72
- Issue:
- 2
- Pages:
- 579–614
- Publication date:
- 2020-08-18
- Acceptance date:
- 2020-07-17
- DOI:
- EISSN:
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1432-0479
- ISSN:
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0938-2259
- Language:
-
English
- Keywords:
- Pubs id:
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1125315
- Local pid:
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pubs:1125315
- Deposit date:
-
2020-08-12
Terms of use
- Copyright holder:
- Bar-Isaac et al.
- Copyright date:
- 2020
- Rights statement:
- © The Author(s) 2020. Open Access. This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.
- Licence:
- CC Attribution (CC BY)
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