scholarly journals The Compromise Game: Two-Sided Adverse Selection in the Laboratory

2009 ◽  
Vol 1 (1) ◽  
pp. 151-181 ◽  
Author(s):  
Juan D Carrillo ◽  
Thomas R Palfrey
Keyword(s):  
Adverse Selection ◽  
Private Information ◽  
Cognitive Limitations ◽  
High Payoff

We analyze a game of two-sided private information where players have privately known “strengths” and can decide to fight or compromise. If either chooses to fight, the stronger player receives a high payoff and the weaker player receives a low payoff. If both choose to compromise, each player receives an intermediate payoff. The only equilibrium is for players to always fight. In our experiment, we observe frequent compromise, more fighting the lower the compromise payoff and less fighting by first than second movers. We explore several theories of cognitive limitations in an attempt to understand these anomalous findings. (JEL C91, D82)

scholarly journals When Salespeople Manage Customer Relationships: Multidimensional Incentives and Private Information

2019 ◽  
Vol 56 (5) ◽  
pp. 749-766 ◽  
Author(s):  
Minkyung Kim ◽  
K. Sudhir ◽  
Kosuke Uetake ◽  
Rodrigo Canales
Keyword(s):  
Moral Hazard ◽  
Adverse Selection ◽  
Customer Relationship Management ◽  
Private Information ◽  
Information Acquisition ◽  
Relationship Management ◽  
Selection Effect ◽  
Sales Performance ◽  
Customer Relationships ◽  
Customer Relationship

At many firms, incentivized salespeople with private information about customers are responsible for customer relationship management. Although incentives motivate sales performance, private information can induce moral hazard by salespeople to gain compensation at the expense of the firm. The authors investigate the sales performance–moral hazard trade-off in response to multidimensional performance (acquisition and maintenance) incentives in the presence of private information. Using unique panel data on customer loan acquisition and repayments linked to salespeople from a microfinance bank, the authors detect evidence of salesperson private information. Acquisition incentives induce salesperson moral hazard, leading to adverse customer selection, but maintenance incentives moderate it as salespeople recognize the negative effects of acquiring low-quality customers on future payoffs. Critically, without the moderating effect of maintenance incentives, the adverse selection effect of acquisition incentives overwhelms the sales-enhancing effects, clarifying the importance of multidimensional incentives for customer relationship management. Reducing private information (through job transfers) hurts customer maintenance but has greater impact on productivity by moderating adverse selection at acquisition. This article also contributes to the recent literature on detecting and disentangling customer adverse selection and customer moral hazard (defaults) with a new identification strategy that exploits the time-varying effects of salesperson incentives.

scholarly journals Adverse Selection Dynamics in Privately-Produced Safe Debt Markets

2020 ◽  
Vol 2020 (089) ◽  
pp. 1-60
Author(s):  
Nathan Foley-Fisher ◽  
◽  
Gary Gorton ◽  
Stéphane Verani ◽  
◽  
...  
Keyword(s):  
Adverse Selection ◽  
Private Information ◽  
Banking System ◽  
Selection Dynamics ◽  
Debt Markets ◽  
Asset Class ◽  
Investment Grade

Privately-produced safe debt is designed so that there is no adverse selection in trade. This is because no agent finds it profitable to produce private information about the debt’s backing and all agents know this (i.e., it is information-insensitive). But in some macro states, it becomes profitable for some agents to produce private information, and then the debt faces adverse selection when traded (i.e., it becomes information-sensitive). We empirically study these adverse selection dynamics in a very important asset class, collateralized loan obligations, a large symbiotic appendage of the regulated banking system, which finances loans to below investment-grade firms.

Adverse Selection, Private Information, and Lowballing in Insurance Markets

1990 ◽  
Vol 63 (2) ◽  
pp. 145 ◽  
Author(s):  
Stephen P. D'Arcy ◽  
Neil A. Doherty
Keyword(s):  
Adverse Selection ◽  
Private Information ◽  
Insurance Markets

Mechanism Design for R&D Outsourcing with Double-Sided Moral Hazard and Double-Sided Adverse Selection

2011 ◽  
Vol 204-210 ◽  
pp. 1569-1574
Author(s):  
Xu Ding ◽  
Wei Dong Meng ◽  
Bo Huang ◽  
Feng Ming Tao
Keyword(s):  
Moral Hazard ◽  
Mechanism Design ◽  
Adverse Selection ◽  
Private Information ◽  
Incentive Mechanism ◽  
Profit Sharing ◽  
Transfer Payment

It is studied that how to use profit sharing arrangement as an incentive mechanism to stimulate both parties of R&D outsourcing to reveal their private information and commit enough R&D resources or efforts. First, it is proved that the double-sided moral hazard in R&D outsourcing can not be totally prevented under traditional profit-sharing arrangement, namely, fixed, proportional or mixed profit-sharing arrangement. And a new mixed profit sharing arrangement is proposed, which is composed of a fixed transfer payment and allocation proportion, and proved to be able to prevent the double-sided moral hazard, and motivate both parties to reveal their private information and commit enough efforts.

A Structural Model of a Multitasking Salesforce: Incentives, Private Information, and Job Design

2021 ◽  
Author(s):  
Minkyung Kim ◽  
K. Sudhir ◽  
Kosuke Uetake
Keyword(s):  
Adverse Selection ◽  
Private Information ◽  
Structural Model ◽  
Job Design ◽  
Estimation Methods ◽  
Efficiency Gain ◽  
Function Estimation ◽  
Task Specialization ◽  
Heterogeneous Effects ◽  
Two Step Estimation

This paper broadens the focus of empirical research on salesforce management to include multitasking settings with multidimensional incentives, where salespeople have private information about customers. This allows us to ask novel substantive questions around multidimensional incentive design and job design while managing the costs and benefits of private information. To this end, the paper introduces the first structural model of a multitasking salesforce in response to multidimensional incentives. The model also accommodates (i) dynamic intertemporal tradeoffs in effort choice across the tasks and (ii) salesperson’s private information about customers. We apply our model in a rich empirical setting in microfinance and illustrate how to address various identification and estimation challenges. We extend two-step estimation methods used for unidimensional compensation plans by embedding a flexible machine learning (random forest) model in the first-stage multitasking policy function estimation within an iterative procedure that accounts for salesperson heterogeneity and private information. Estimates reveal two latent segments of salespeople—a hunter segment that is more efficient in loan acquisition and a farmer segment that is more efficient in loan collection. Counterfactuals reveal heterogeneous effects: hunters’ private information hurts the firm as they engage in adverse selection; farmers’ private information helps the firm as they use it to better collect loans. The payoff complementarity induced by multiplicative incentive aggregation softens adverse specialization by hunters relative to additive aggregation but hurts performance among farmers. Overall, task specialization in job design for hunters (acquisition) and farmers (collection) hurts the firm as adverse selection harm overwhelms efficiency gain. This paper was accepted by Duncan Simester, marketing.

A Simple Model of Corporate Fiduciary Duties: With an Application to Corporate Compliance

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
William C. Bunting
Keyword(s):  
Simple Model ◽  
Moral Hazard ◽  
Adverse Selection ◽  
Private Information ◽  
Third Party ◽  
Duty Of Care ◽  
Court System ◽  
Corporate Compliance ◽  
Corporate Loyalty ◽  
Audit Technology

Abstract This article models the duty of care as a response to moral hazard where the principal seeks to induce effort that is costly to the agent and unobservable by the principal. The duty of loyalty, by contrast, is modeled as a response to adverse selection where the principal seeks truthful disclosure of private information held by the agent. This model of corporate loyalty differs importantly with standard adverse selection models, however, in that the principal cannot use available contracting variables as a screening mechanism to ensure honest disclosure and must rely upon the use of an external third-party audit technology, such as the court system. This article extends the model to the issue of corporate compliance and argues that the optimal judicial approach would define the duty to monitor as a subset of due care – and not loyalty – but hold that the usual legal protections provided for due care violations no longer apply.

scholarly journals Adverse Selection Dynamics in Privately-Produced Safe Debt Markets

2020 ◽  
Vol 2020 (089) ◽  
pp. 1-60
Author(s):  
Nathan Foley-Fisher ◽  
◽  
Gary Gorton ◽  
Stéphane Verani ◽  
◽  
...  
Keyword(s):  
Adverse Selection ◽  
Private Information ◽  
Banking System ◽  
Selection Dynamics ◽  
Debt Markets ◽  
Asset Class ◽  
Investment Grade

Privately-produced safe debt is designed so that there is no adverse selection in trade. This is because no agent finds it profitable to produce private information about the debt’s backing and all agents know this (i.e., it is information-insensitive). But in some macro states, it becomes profitable for some agents to produce private information, and then the debt faces adverse selection when traded (i.e., it becomes information-sensitive). We empirically study these adverse selection dynamics in a very important asset class, collateralized loan obligations, a large symbiotic appendage of the regulated banking system, which finances loans to below investment-grade firms.

A Folk Theorem for Repeated Elections with Adverse Selection

2014 ◽  
Vol 2 (2) ◽  
pp. 213-242 ◽  
Author(s):  
John Duggan
Keyword(s):  
Adverse Selection ◽  
Private Information ◽  
Incentive Compatibility ◽  
Folk Theorem ◽  
Perfect Bayesian Equilibrium ◽  
Policy Space ◽  
One Dimensional ◽  
Policy Choices ◽  
Bayesian Equilibrium ◽  
Strict Concavity

This article establishes a folk theorem for a model of repeated elections with adverse selection: when citizens (voters and politicians) are sufficiently patient, arbitrary policy paths through arbitrarily large regions of the policy space can be supported by a refinement of perfect Bayesian equilibrium. Politicians are policy motivated (so office benefits cannot be used to incentivize policy choices), the policy space is one-dimensional (limiting the dimensionality of the set of utility imputations), and politicians’ preferences are private information (so punishments cannot be targeted to a specific type). The equilibrium construction relies critically on differentiability and strict concavity of citizens’ utility functions. An extension of the arguments allows policy paths to depend on the office holder's type, subject to incentive compatibility constraints.

Dynamic Adverse Selection: A Theory of Illiquidity, Fire Sales, and Flight to Quality

2014 ◽  
Vol 104 (7) ◽  
pp. 1875-1908 ◽  
Author(s):  
Veronica Guerrieri ◽  
Robert Shimer
Keyword(s):  
Adverse Selection ◽  
Private Information ◽  
Dynamic Equilibrium ◽  
Asset Markets ◽  
Signal Quality ◽  
Unique Equilibrium ◽  
High Quality ◽  
Fire Sales ◽  
Flight To Quality ◽  
Dynamic Equilibrium Model

We develop a dynamic equilibrium model of asset markets with adverse selection. There exists a unique equilibrium in which better quality assets trade at higher prices but with a lower price-dividend ratio in less liquid markets. Sellers of high-quality assets signal quality by accepting a lower trading probability. We show how the distribution of sellers' private information affects an asset's price and liquidity, how a change in that distribution can cause a fire sale and a flight to quality, and how asset purchase and subsidy programs may raise prices and liquidity and reverse the flight to quality. (JEL D82, G12)

scholarly journals An Uncertain Wage Contract Model with Adverse Selection and Moral Hazard

2014 ◽  
Vol 2014 ◽  
pp. 1-9 ◽  
Author(s):  
Xiulan Wang ◽  
Yanfei Lan ◽  
Jiao Wang
Keyword(s):  
Moral Hazard ◽  
Adverse Selection ◽  
Private Information ◽  
Equivalent Form ◽  
Optimal Solution ◽  
Uncertain Variable ◽  
Wage Increase ◽  
Effort Level ◽  
Proposed Model ◽  
Wage Contract

This paper considers a wage contract design problem faced by an employer (he) who employs an employee (she) to work for him in labor market. Since the employee's ability that affects the productivity is her private information and cannot be observed by the employer, it can be characterized as an uncertain variable. Moreover, the employee's effort is unobservable to the employer, and the employee can select her effort level to maximize her utility. Thus, an uncertain wage contract model with adverse selection and moral hazard is established to maximize the employer's expected profit. And the model analysis mainly focuses on the equivalent form of the proposed wage contract model and the optimal solution to this form. The optimal solution indicates that both the employee's effort level and the wage increase with the employee's ability. Lastly, a numerical example is given to illustrate the effectiveness of the proposed model.

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