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.

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.

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

2020 ◽  
Author(s):  
Nathan Foley-Fisher ◽  
Gary Gorton ◽  
Stéphane Verani
Keyword(s):  
Adverse Selection ◽  
Selection Dynamics ◽  
Debt Markets

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

2020 ◽  
Author(s):  
Nathan Foley-Fisher ◽  
Gary B. Gorton ◽  
Stephane Verani
Keyword(s):  
Adverse Selection ◽  
Selection Dynamics ◽  
Debt Markets

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

2020 ◽  
Author(s):  
Nathan Foley-Fisher ◽  
Gary B. Gorton ◽  
Stephane Verani
Keyword(s):  
Adverse Selection ◽  
Selection Dynamics ◽  
Debt Markets

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.

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

If Boilerplate Could Talk: The Work of Standard Terms in Sovereign Bond Contracts

2019 ◽  
Vol 44 (03) ◽  
pp. 617-646 ◽  
Author(s):  
Anna Gelpern ◽  
Mitu Gulati ◽  
Jeromin Zettelmeyer
Keyword(s):  
Private Information ◽  
Sovereign Debt ◽  
Standard Form ◽  
Sovereign Bond ◽  
Standard Contract ◽  
Debt Markets ◽  
Financial Contract ◽  
Standard Terms

Standard contract terms are “sticky”: they rarely change, even if change appears to be in the parties’ interest. Multiple theories to explain stickiness do not reach consensus on its causes. We investigate the role of stickiness in sovereign bond contracts, where it would be especially costly and therefore puzzling. In our interviews with more than a 100 officials responsible for the bond contracts of twenty-eight countries, they linked reluctance to change non-financial contract terms and the imperative of following a “market standard” for such terms. When a term could be described as standard for the government’s debt stock or borrower cohort, its content often came across as secondary. Sovereign debt managers seemed willing to forgo some of the benefits of contract terms for dealing with contingencies and revealing private information to avoid negative signals and maintain the liquidity of primary and secondary debt markets. Interviews with investors suggested a similar focus on standard form and a limited engagement with contract substance.

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.

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)

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.

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