Adverse Selection

Statistical discrimination occurs when a characteristic, such as sex, is used as an indicator of the risk group of an individual. The theory of adverse selection is used to explain the occurrence of statistical discrimination. A model of the market for collision insurance, which is based on the theory of adverse selection, is estimated on Canadian data. The results suggest that adverse selection occurs in this market. Simulations of the effect of prohibiting sexual discrimination in the 21–24 age group indicate that the premiums for single females would increase substantially and that a significant proportion would no longer purchase collision insurance.

It has long been standard in agency theory to search for incentive-compatible mechanisms on the assumption that people care only about their own material wealth. However, this assumption is clearly refuted by numerous experiments, and we feel that it may be useful to consider nonpecuniary utility in mechanism design and contract theory. Accordingly, we devise an experiment to explore optimal contracts in an adverse-selection context. A principal proposes one of three contract menus, each of which offers a choice of two incentive-compatible contracts, to two agents whose types are unknown to the principal. The agents know the set of possible menus, and choose to either accept one of the two contracts offered in the proposed menu or to reject the menu altogether; a rejection by either agent leads to lower (and equal) reservation payoffs for all parties. While all three possible menus favor the principal, they do so to varying degrees. We observe numerous rejections of the more lopside...

Centre for Management and Economic Research (CMER) Lahore University of Management Sciences (LUMS) Opposite Sector 'U', DHA, Cantt, Lahore, 54792 Pakistan URL:http//ravi.lums .edu.pk/cmer ... Abid. A. Burki Director CMER Associate Professor, Economics School of ...

In this review, I criticize the ability of popular asymmetric information-based models to explain the magnitude of the underpricing of initial public offerings (IPOs) that is observed. I suggest that the quantitative magnitude of underpricing can be explained with a market structure in which underwriters want to underprice excessively, issuers are focused on services bundled with underwriting rather than on maximizing the offer proceeds, and there is limited competition between underwriters. Since the technology bubble burst in 2000, U.S. IPO volume has been low. Although regulatory burdens undoubtedly account for some of the decline, I suggest that much of the decline may be due to a structural shift that has lessened the profitability of small independent companies relative to their value as part of a larger, more established organization that can realize economies of scope. I also discuss the long-run performance literature. My interpretation of the evidence is that except for th...

We find that option listings are associated with a decrease in the variance of the pricing error, a decrease in the adverse selection component of the spread, and an increase in the relative weight placed by the specialist on public information in revising prices for the underlying stocks. We also find that there is a decrease in the spread and increases in quoted depth, trading volume, trading frequency, and transaction size after option listings. Overall, our results suggest that option listings improve the market quality of the underlying stocks.

Los contratos de construcción, y en especial aquellos de suma alzada, están diseñados no solo para traspasar el riesgo de precio desde el mandante hasta el contratista, que es la parte que está en mejor posición para evaluar y controlar dicho riesgo, sino que para eliminar o mitigar los problemas que surgen de la asimetría de información entre los contratantes, inclu-yendo los fenómenos conocidos como selección adversa y riesgo moral. Si dichos fenómenos son efectivamente controlados, se puede concluir que este tipo de contratos tenderá a promover la eficiencia del merca-do, reducirá los costos de transacción y maximizará los denominados excedentes sociales de la cooperación. La medida en que estos diseños contractuales alcanzan sus objetivos depende, en definitiva, del valor que en los hechos la jurisprudencia les reconozca. Analizada la jurisprudencia reciente de los tribunales superiores de justicia chilenos, se puede concluir que, en general, los jueces tienden a respetar y aplicar estos mecanismos contractuales. Palabras clave: contrato de construcción, asimetría de información, selección adversa, riesgo moral, análisis económico del derecho.

Construction agreements, and especially those of lump sum, are designed not only to transfer the price risk from the principal to the contractor, which is the party that is in the best position to evaluate and control said risk, but for eliminating or mitigating the problems that arise from
the information asymmetry between the contracting parties, including
the phenomena known as adverse selection and moral hazard. If these
phenomena are effectively controlled, it can be concluded that this type
of contract will tend to promote market efficiency, reduce transaction
costs and maximize the so-called social surpluses of cooperation. The
measure in which these contractual designs ultimately reach their objectives depends on the value that, in reality, the jurisprudence attributes to them. Analyzing the recent jurisprudence of the Chilean high courts of justice, it can be concluded that, in general, judges tend to respect these contractual mechanisms.
Keywords: construction agreements, information asymmetry, adverse
selection, moral hazard, economic analysis of law.

This paper describes some of the main aspects of microfinance (MF) in underdeveloped countries, showing why it has succeeded in reaching the poor, while traditional banks have not, using innovative devices such as group lending with self-monitoring, short repayments instalments and small loans. The aim of the paper is to show how microfinance institutions (MFIs) can fill the lack of traditional banks in underdeveloped countries, proposing unconventional products and innovative business models. This study also investigates about possible synergies between banks and MFIs, avoiding overlaps and mission drift. It is shown that MFIs can improve their outreach using technological devices such as M-banking. Innovative questions and proposals are illustrated, so as to give an updated and synthetic picture of the state-of-the-art, which might prove useful for researchers and practitioners.

ABSTRACT There is an emerging consensus among macro-economists that differences in technology across countries account for the major differences in per-capita GDP and the wages of workers with similar skills across countries. Accounting for differences in technology levels across countries thus can go a long way towards understanding global inequality. One mechanism by which poorer countries can catch up with richer countries is through technological diffusion, the adoption by low-income countries of the advanced technologies produced in high-income countries. In this survey, we examine recent micro studies that focus on understanding the adoption process. If technological diffusion is a major channel by which poor countries can develop, it must be the case that technology adoption is incomplete or the inputs associated with the technologies are under-utilized in poor, or slow-growing economies. Thus, obtaining a better understanding of the constraints on adoption is useful in understanding a major component of growth.