We illustrate the corrosive e¤ect of even small amounts of adverse selection in an asset market and how it can lead to the total breakdown of trade. The problem is the failure of “market con…dence”, de…ned as approximate common knowledge of an upper bound on expected losses. Small probability events can unravel market con…dence. We discuss the role of contagious adverse selection and the proble...

This paper introduces a sequential search model with adverse selection. We study information aggregation by the price–how close the equilibrium prices are to the full information prices–when the search frictions are small. We identify circumstances under which prices fail to aggregate information well even when the search frictions are small. We trace this to a strong form of the winner’s curse...

We develop a model to study the role of individual rationality in economics and biology. The model’s agents differ continuously in their ability to make rational choices. The agents’ objective is to ensure their individual survival over time or, equivalently, to maximize profits. In equilibrium, however, individually rational agents who maximize their objective survival probability are, individ...

This set of lecture notes covers a general model of adverse selection as well as a leading example— that of a price discriminating monopolist— due to Maskin and Riley (1984). At the end of this unit, students should understand the application of the revelation principal to this class of models, the general solution techniques, and the key economic trade-o¤— e¢ ciency versus information rent sav...

This article discusses risk classification and develops and discusses a framework for estimating the effects of restrictions on risk classification. It is shown that expected losses due to adverse selection depend only on means, variances and covariances of insurance factors and rates of uptake of insurance. Percentage loadings required to avoid losses are displayed. Correlated information, suc...

The empirical evidence of adverse selection in insurance markets is mixed. The problem in assessing the extent of adverse selection is that insurance coverage also give rise to moral hazard. With private information— on which agents act— generally being unobservable to the researcher, is is di¢ cult to distinguish adverse selection from moral hazard. Unique micro data is here used to provide a ...

This paper explores a dynamic model of adverse selection in which trading partners receive noisy information. A monopolistic buyer wants to procure service. Seller’s cost depend on the buyer’s type. The buyer contacts sellers sequentially and enters into a bilateral bargaining game. Each seller observes the buyer’s offer. In addition, each seller observes a noisy signal. Contacting sellers (sea...

The soundness and efficiency of banks is one of the important subjects that neglecting it can have adverse consequences for every country's economy. For economies depending on the money market, such as the Iran economy, this subject is more critical. Therefore, in this study, using panel data related to 16 Iranian banks for the annual period of 2010-2017, the economic efficiency was determined ...