Working Paper: CEPR ID: DP3428
Authors: Anke Kessler; Christoph Llifesmann; Patrick Schmitz
Abstract: The Paper studies a straightforward adverse selection problem in which an informative but imperfect signal on the agent?s type becomes public ex post. The agent is protected by limited liability, which rules out unboundedly high penalties. Analysing the consequences of the additional information and the corresponding extension of the space of feasible contracts, the following conclusions emerge. First, the qualitative effects of the signal can be unambiguously tied to the nature of the underlying problem (e.g., whether the agent is in a ?buyer? or a ?seller? position). Second, the joint surplus of the relationship may well fall, i.e., the distortions due to informational asymmetries can become more pronounced although more information is now available. Finally, the agent may benefit from releasing additional signals because of an associated increase in expected informational rents.
Keywords: adverse selection; ex post information; limited liability
JEL Codes: D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| agent type (L85) | signal effects (L96) |
| ex post information (G14) | joint surplus (H62) |
| additional information (Y50) | distortions (H31) |
| agent's utility (D11) | contracted action (D86) |
| release of information (L86) | expected informational rents (D89) |