asymmetric information

conclusions remain the same: under asymmetric information, crowdfunding is a signal of quality compared to spot sales. In the case of multple types, however, an equilibrium may exist where only the type with the lowest demand (speak- ing about Proposition 2 when = 0) will be indi¤erent between crowdfunding and spot sales and every other type selects crowdfunding. When > 0, our analysis shows that the results may hold even in a multiple types environment though more research is required. The main implication of our analysis holds. In particular, our results show that there is no semi-separating equlibrium where the average quality of types that choose crowdfunding is lower than those that choose spot sales, which is consistent with our basic model.

The …nancial market model of this chapter is similar to that in Yuan (2005, 2006), who studies a REE with asymmetric information and constraints on borrowing and shorting. She numerically shows that, in presence of borrowing restrictions, a higher market price can reduce uncertainty about the constraint status of informed investors, and that this information e¤ect can be strong enough to cause a backward bending demand curve. In contrast, the …rst part of this chapter provides a simple closed-form solution of a model that is simpli…ed in one dimension but allows for more generality in other dimensions. 5 Finally, Bai et al. (2006) and Marin and Olivier (2008) study the e¤ects of short-sale constraints when investors trade for informational and allocational purposes. In both papers, trading constraints limit the positions of all informed traders. When the constraints bind, asset prices stop re‡ecting fundamentals, uninformed investors demand a large discount, and prices exhibit large drops. Therefore, in these models high prices are more informative than low prices. In contrast, in models presented here and in Yuan (2005, 2006), only a subset of informed investors are subject to the short-selling constraint, and uninformed investors need to form beliefs about the size of the demand shock, i.e. the constraint status of informed investors. The most important distinction is that short-sale constraints bind for high prices, making them less informative than low prices.

We therefore propose a fresh perspective on the role of renegotiation, based on asymmetric information and unforeseen contingency. Our approach departs from the traditional (complete information) contracting literature which views renegotiation as a constraint on contracting and explains its occurrence through some form of contractual incompleteness that it creates (Maskin and Moore, 1999; Maskin and Tirole, 1999; Hart and Moore, 1999; Segal, 1999; Che and Hausch, 1999). Also, in this literature, renegotiation is assumed to be always efficient, and hence, the source of inefficiency is often associated with the “hold up” problem ex ante (Hart, 1995).

Let E be an exchange economy with asymmetric information as in [21] and [22]. Suppose that (Ω, F ) is a measurable space, where Ω is a finite set denoting all possible states of nature and the σ-algebra F denotes all events. Following from the well-known mixed market model, the space of agents is a measure space (T, Σ, µ) with a complete, finite and positive measure µ, where T is the set of agents, Σ is the σ-algebra of measurable subsets of T whose economic weights on the market are given by µ. Following from a classical result in measure theory, T can be decomposed into two parts: one is atomelss and the other contains countably many atoms. That is, T = T 0 ∪ T 1 , where T 0 is the atomless part and T 1 is the countable

We then detail the veto mechanism by analyzing particular and more explicit sharing rules, following the traditional ways of modelling information within coalitions (common, pooled and private information). We consider two mechanisms with a precise economical meaning. In the first one, the process of information sharing may only take place within coalitions with a size smaller than an exogenous threshold. It has a natural interpretation if the transmission of information is costly; larger the size of the coalition more difficult the communication among its members. Thus, only small coalitions pool information. In contrast, in the second mechanism, traders pool information only in coalitions whose measure is larger than another exogenous threshold. In this case, the intuition is that members within big coalitions presume that their own information is irrelevant (the probability of finding members with the same information is increasing with the size of the group) and, consequently, they spontaneously share out their information. Under the conditions which guarantee Vind’s result in an asymmetric information framework, our main result states that the core solutions associated with these mechanisms are equivalent and, depending on the informational requirement for an allocation to be feasible, they coincide with either the weak fine core or the fine core.

By way of preview, the evidence supports the predictions of Flannery’s and Diamond’s models for low-risk firms – maturity is an upward sloping function of risk ratings (Test 1) and a reduction in informational asymmetries is associated with increased maturities (Test 2) for these firms. 1 These findings for low-risk firms are also consistent with most of the empirical literature. However, our evidence for high-risk firms conflicts with the predictions of Diamond’s model and with much of the extant empirical literature. The most likely explanation for our difference from the literature for high-risk firms may be our use of bank loans rather than publicly issued debt, as banks may be better able than public markets to use tools other than short maturities to resolve asymmetric information problems for high-risk firms (Berlin and Loeys (1988)). We do, however, find that the predictions of Diamond’s model for high-risk firms appear to hold for one group of small businesses – those without loan commitments – and we offer some possible explanations for this finding.

In this paper, we measure the consequences of asymmetric information and imperfect competition in the Italian market for small business lines of credit. To do so, we exploit detailed, proprietary data on a random sample of Italian firms, the population of medium and large Italian banks, individual lines of credit be- tween them, and subsequent individual defaults previously analysed in Panetta, Schivardi and Shum (2009). While our data include a measure of observable credit risk comparable to that available to a bank during the application process, we allow firms to have private information about the underlying riskiness of their project. This riskiness influences banks’ pricing of loans as higher interest rates attract a riskier pool of borrowers, increasing aggregate default probabilities. To measure the distribution of asymmetric firm riski- ness, we estimate models of credit, loan size, default, and bank pricing. Data on default, loan use, demand, and pricing separately identify the distribution of private riskiness from heterogeneous firm disutility from paying interest. Preliminary results suggest evidence of asymmetric information, separately identifying ad- verse selection and moral hazard. We then use our results to simulate counterfactual outcomes varying both asymmetric information and competition in local banking markets. We do this to measure the consequences of adverse selection and moral hazard, and to investigate how competition can mitigate or exacerbate these effects.

Thus we have seen that depending upon the values of the parameters, the extra information possessed by the Finder can be beneficial, but it can also be harmful, when compared to the case where both individuals have full information. It is thus reasonable to ask under what circumstances will the asymmetric information situation that we have described actually occur in real populations? This is more likely to happen when resources are either not immediately visible to the animals, as in a large nest concealed within a hedgerow or if the contest between the animals progresses quickly so that the Joiner does not have chance to assess the value of the reward. In contrast in situations where contests progress more slowly and are of a clearly visible resource, for example a dead animal on an open plain, we might expect the full information case to hold.

Asymmetric information lies at the heart of capital markets and how it induces information flow and economic dynamics is a key element to understanding the structure and function of economic systems generally and of price discovery in particular 1–3. The information- theoretic underpinnings of economics also provide a common framework through which economics can leverage results in other fields, an example being the well-known use of statistical mechanics in financial economics see, e.g., 44, 45 and references therein. In addition to the statistical-mechanics representation of financial economics, however, a quantum-mechanics representation has also emerged see 5, 18–30, 42, 46–48 and the purpose of this paper is to show that this quantum framework too can be derived from asymmetric information, thus providing a more comprehensive information-theoretic basis for financial economics.

Their work can be synthesized as it follows: Akerlof showed that asymmetric information can induce the presence of adverse selection in the market, Spence showed that informed agents can be determined to signal their private information to the uninformed agents and Stiglitz demonstrated that the less informed agents can get the information indirectly from the informed agents by offering them contracts that can be substituted one by the others in a transaction and auto-select the necessary information.

New firms and the entrepreneurs that initiate them are beset by problems of asymmetric information with respect to their prospects for success, as well as with respect to the quality of labor they are able to hire and their ability to obtain credit on good terms. The fact that new entrepreneurs are to a large extent indistinguishable from one another means that creditors are unable to tailor financial terms to entrepreneurs’ project qualities. As well, since they are hiring workers for the first time, they do not have the experience to discern the quality of potential workers and whether they will be a good match for the particular projects being initiated. This puts new firms at a significant disadvantage with respect to existing firms whose track records have been proven, who may have internal finance, and who have had a chance to sort out good or suitable workers from bad or unsuitable ones. These problems naturally lead to the question of whether public policies should actively encourage the entry of new entrepreneurial firms. That is the focus of this paper.

Next, we investigate a market in which bets are submitted sequentially. The sequential version takes into account information externalities, resulting from the inferences later bettors can draw from the decisions of earlier bettors, and the related strategic incentives to influence later bettors. It also includes payoff externalities resulting from earlier bettors’ influence on the odds, and thus the payoffs to each action, that later bettors face. We show that a separating equilibrium can fail to exist, and will typically disappear when the number of bettors increases. This non-existence is related to the fact that bettors exhibit herd behavior, as in standard models of information cascades (Banerjee, 1992; Bikhchandani, Hirshleifer, and Welch, 1992), which is the imitation of predecessors’ choices while overriding own private information. However, as in most multi-agent sequential trade models with asymmetric information (e.g., Avery and Zemsky, 1998), the price mechanism ensures that complete imitation does not continue indefinitely.

intends to buy. On the other side, the seller can give warranty for the car. However, adding information and giving warranty cause significant costs and it is risky so asymmetric character of providing adding information can be only reduced, not eliminated. Similar asymmetric information can be seen at insurance markets in connection with the risk of insurance indemnity, for example. Here, insurance consumers, i.e. policyholders are in more favorable position because the bidders of insurance alternatives are not quite informed about the risk dimension they take insuring some clients. Of course, they buy insurance protection where the risk of insurance against damage is bigger. The risk rate of insured population is bigger than the average risk rate for the whole population. Insurance bidders cannot determine exactly risk factors for some clients, but they can evaluate the percent of risky cases and form relative high price for their services. A relative high insurance premium, together with the readiness to bear risk, dissuades persons to buy insurance where risky factors are less. Counter-selection in cases of voluntary forms of insurance appears at the market of insurance, for example, accident insurance, life insurance, full coverage for the car, and so on.

Further, the dynamic trade-off theory is improved from two aspects. First, beyond the seminal works of tax shield and bankruptcy risk, the deviations and subsequent movement toward a target are influenced by asymmetric information that could be captured by a measure that is easy to compute and available. Second, the power of capital structure stationarity has to be considered in the model specifications. The influence of deviations from the target lasted for approximately four quarters, while the influence of another variable in the restricted model lasted for a single quarter. The dynamics of the capital structure warranted model specifications related to other variables in asymmetric information and traditional capital structure determinants. Such a finding relates to the pecking-order theory, where asymmetric information is among its foundations.

It is important to notice that in sharp contrast with others asymmetric information models, as for example the rational expectations equilibrium model (Radner (1979)), in the framework of Walrasian expectation equilibrium, it is assumed that prices do not reveal any private information ex ante. They rather reflect agents’ informational asymmetries since they have been obtained by maximizing utility taking into account the private information of each agent. Our aim in this paper is to use a market-game approach to study the behavior of these markets and to analyze the mechanism of price formation.

Our aim in this paper is to prove a core convergence theorem for exchange economies in the presence of asymmetric information. The particular manner in which we model the asymmetry of information follows the development in McLean and Postlewaite (2002a, 2003). Agents’ utility functions will depend on an underlying but unobserved state of nature θ, and each agent will receive a private signal that is correlated with the state of nature. A replication of this initial economy consists of a set of agents whose utility functions and initial endowments are the same as those in the underlying initial economy, but whose private signals are independent conditional on θ. No agent’s information is redundant in this replication procedure: regardless of the number of replications, each agent still has information that can not be inferred from the aggregate information of other agents.

Empirically, most data sets on automobile insurance (including the one studied in this paper) do not reject the null of zero correlation. The simplest explanation is probably the absence of significant asymmetric information in automobile insurance, although more complex stories can be evoked (see de Meza and Webb (2001) and CS for a detailed discussion). Finding a significant, negative correlation would raise a more serious challenge to the theory. Our paper, together with previous findings by Jullien, Salani´e and Salani´e (2001), suggests that the explanation should be grounded into market power and adverse selection on risk-aversion 15 . In fact, the theoretical results 15 Using subjective assessments by insurees, Finkelstein and McGarry (2003) find evi-

Assume that an accident has occurred and that the plaintiff has brought charges against the alleged defendant. The plaintiff is aware of her level of damages, but the defen- dant is not. Denoting damages by x, the defendant knows that x ∈ [ g g x x x , ] , > > x 0 , and his priors over this are assumed to be uniformly distributed. Here, g > 0 is a “severity parameter”: as g rises, the mean and variance of the defendant’s priors increase, as might be expected with a more severe injury. Damages are assumed to be the only source of asymmetric information in the model. As we will see, this is suffi- cient to generate settlement delay (as the defendant struggles to find an appropriate settlement offer). However, it also means that all other features of the litigation are common knowledge, including, importantly, the defendant’s liability for the dam- ages claimed. The authors assume that this liability is captured by p ∈ ( ) 0,1 , with higher values of implying a more liable defendant.

When investors are rational the prices are supposed to correctly reflect firms’ current and future earnings and not only current earnings. In such an environment and assuming that there is no asymmetric information or agency costs, how can one explain that first, firms time their issues and second, why the firms issue shares when operating performance is high and why it becomes low in the long run after issue? The literature based on rational investors is able to argue why firms may be interested in issuing equity in periods when market prices are high although it is not focused on explaining the link between IPO size and changes in operating performance after issue. 4

Asymmetric information is part of the broad field of the Theory of Argumentation, TA (Bondarenko, Dung, Kowalski, Toni, 1997). In the model presented by these authors a hypothesis can be defeated (or attacked) if it can be demonstrated that the opposite is more consistency. This phenomenon responds to reasonable dispute that must exist between different views about a particular problem. More concisely, TA is an extension to the classical and modern conception of rhetoric Aristotle / (Perelman, which comes from the semantic and non-monotonic logic, and extends to the accession of arguments in logic programming and Artificial Intelligence (AI). Persuasion suggests a set of hypotheses that adheres to an auditorium capable of confronting conflicting positions. In short, the theory of argumentation is a variant of the pragmatic applied to various fields of social sciences: business, advertising, political campaigns, religious sects and media.