Phenomenon Of Adverse Selection Research Articles

The JOBS Act and IPO underpricing

In the realm of Initial Public Offerings (IPOs), the initial day stock price return, known as underpricing, poses a considerable financial burden on capital issuers. This study scrutinizes two hypotheses regarding IPO underpricing: the general information asymmetry theory, positing that ‘underpricing’ compensates for investor uncertainty about firm quality, and the practical underwriter-institutional investor collusion, potentially explaining the recent upswing in underpricing.Our findings indicate that the JOBS Act contributes to an increase in overall IPO underpricing post its 2012 enactment, aligning with the traditional adverse selection phenomenon. Notably, empirical analysis reveals a corresponding upsurge in underpricing tied to the increasing proportional shares of institutional investors in the post-Act period, supporting the collusion hypothesis. In summary, this paper underscores a notable side effect of the JOBS Act, revealing a pronounced increase in underpricing for issuers and subsequently enhancing the attractiveness of the underwriting business.

Adverse selection and health insurance decisions of young migrant workers: An empirical study in China.

Using data from the China Migrants Dynamic Survey (CMDS) in 2017, this study assessed adverse selection and the impact of mobility factors on adverse selection by analyzing two samples of young migrant workers. The results of the sample analysis showed that young migrant workers with higher health risks were more inclined to enroll in health insurance, indicating the presence of adverse selection. Mobility distance and settle intention have a heterogeneous effect on adverse selection, with young workers who migrate inter-provincially and intend to settle down being more susceptible. The analysis of the insured samples showed that the phenomenon of adverse selection was also evident in the choice of health insurance, with individuals with higher risks preferring Urban Employee Basic Medical Insurance (UEBMI), which has better financial coverage and benefits compared to Rural Residents' Basic Medical Insurance (URRBMI). The heterogeneity test confirmed that mobility distance plays a role in determining the likelihood of adverse selection, with inter-city and inter-province young migrant workers being more likely to show adverse selection.

Research of two‐period insurance contract model with a low compensation period under adverse selection

The phenomenon of adverse selection caused by asymmetric information dominates the insurance market. In this paper, based on principal‐agent theory, we establish a two‐period dynamic insurance contract model with a low compensation period. This model introduces the tools of a low compensation period and the increase and decrease in the bonus to identify the risk types of policyholders. We prove that this model can achieve a strict Pareto improvement relative to the two‐period static insurance contract model with a low compensation period. Moreover, we also graphically analyze the conclusion, which can help insurance companies to design more comprehensive insurance contracts.

MUDANÇA DO CLIMA E SEUS IMPACTOS NO SEGURO AGRÍCOLA NO BRASIL

O presente artigo tem por objetivo avaliar a possibilidade de ocorrência de seleção adversa no mercado de seguro agrícola no Brasil. A seleção adversa ocorre quando os seguros são prioritariamente contratados por agentes com maior risco de sinistro. A hipótese é que tal fenômeno poderia ser deflagrado pelo aumento do valor indenizado em sinistros decorrentes de eventos climáticos extremos, que provocaria posteriormente aumento nos prêmios cobrados pelas empresas seguradoras. Os prêmios mais caros fazem com que as carteiras passem a ser compostas prioritariamente por segurados de maior risco, o que aumentaria ainda mais a recorrência de indenizações a sinistros. Para atender ao objetivo proposto, realizaram-se análises de regressão linear entre sinistros ocorridos em um ano e as contratações no ano seguinte, entre o período de 2003 a 2013, para seis Unidades Federativas do Brasil, sendo elas: Mato Grosso do Sul (MS); Minas Gerais (MG); Paraná (PR); Santa Catarina (SC); Rio Grande do Sul (RS); e São Paulo (SP). A significância das regressões lineares dos dados foi estimada por meio de testes estatísticos de aleatorização. Para os Estados de MS, RS e SP foi possível inferir a ocorrência de seleção adversa no período de 2003 a 2013. Os resultados contribuem para a caracterização e identificação do fenômeno de seleção adversa, que pode causar perdas substanciais do mercado de seguro agrícola no Brasil.

Issues and Types of Adverse Selection and Negative Selection

In a relatively high number of cases, there are selection criteria in everyday life, the implementation of which clearly does not support the development of the economy, even in the short term. At the same time, the phenomenon of adverse selection raises its head relatively rarely in reality, since it is equally dependent on the preconditions of a high degree of hidden information and the complete good faith of the stakeholders. In comparison, negative selection is – by necessity – a more frequent case. In such cases, the relevant information is available to the parties. At the same time, the individual or group possessing the information consciously abuses their dominant position. Moreover, this specifically disadvantages those who currently best comply with the existing selection requirements, but in spite of this are vulnerable due to the lack of a proper negotiating position or interestasserting capability. However, the dominant position or power possessed by the relevant party can also be used “according to its intended purpose”, which enables the implementation of positive selection that is very likely to promote development.

A Study on the Coping Strategy of Financial Supervisory Organization under Information Asymmetry: Case Study of Taiwan's Credit Card Market

Information asymmetry has been a commonly existed phenomenon in banking system. This paper adopted consumer finance data from both government-owned and private- owned banks in Taiwan, variables such as numbers of effective cards, percentages of overdue loans, and revolving interest rate are used to investigate if information asymmetry phenomenon existed in Taiwan's credit card market. During the research period, Taiwan had suffered from severe crisis of credit card debt, financial supervisory organization interfered into the credit card market passively, hoping to improve the information asymmetry phenomenon of the credit card market. However, the research results show that not only information asymmetry phenomenon has not disappeared from Taiwan's credit card market, but worsen the adverse selection phenomenon and promoted moral hazard in certain degree.

Asymmetric Information in Iranian's Health Insurance Market: Testing of Adverse Selection and Moral Hazard.

Background:Asymmetric information is one of the most important issues in insurance market which occurred due to inherent characteristics of one of the agents involved in insurance contracts; hence its management requires designing appropriate policies. This phenomenon can lead to the failure of insurance market via its two consequences, namely, adverse selection and moral hazard.Objective:This study was aimed to evaluate the status of asymmetric information in Iran’s health insurance market with respect to the demand for outpatient services.Materials/sPatients and Methods:This research is a cross sectional study conducted on households living in Iran. The data of the research was extracted from the information on household’s budget survey collected by the Statistical Center of Iran in 2012. In this study, the Generalized Method of Moment model was used and the status of adverse selection and moral hazard was evaluated through calculating the latent health status of individuals in each insurance category. To analyze the data, Excel, Eviews and stata11 software were used.Results:The estimation of parameters of the utility function of the demand for outpatient services (visit, medicine, and Para-clinical services) showed that households were more risk averse in the use of outpatient care than other goods and services. After estimating the health status of households based on their health insurance categories, the results showed that rural-insured people had the best health status and people with supplementary insurance had the worst health status. In addition, the comparison of the conditional distribution of latent health status approved the phenomenon of adverse selection in all insurance groups, with the exception of rural insurance. Moreover, calculation of the elasticity of medical expenses to reimbursement rate confirmed the existence of moral hazard phenomenon.Conclusions:Due to the existence of the phenomena of adverse selection and moral hazard in most of health insurances categories, policymakers need to adjust contracts so that to reduce these phenomena. Given the importance of financing, the presence of such problems can lead to less coverage of health insurance provided by insurers, loss of contracts with health care institutions and service providers, and lower quality of health services.

Lending to 'Lemons': Adverse Selection and the Failure of New Bank Tokyo

In 2005 the Tokyo Government launched a bank, New Bank Tokyo, with the objective of providing finance to the region’s small businesses. Within 3 years the bank had lost the equivalent of one billion US dollars of tax payers’ money and, amid allegations of incompetence, fraudulent lending and criminal connections, it had to be rescued by its sponsor. In this study I show how the widely acknowledged phenomenon of adverse selection, the ‘lemon’ problem, underlay the failure of New Bank, and moreover, I identify a potential new rationale for the Akerlof process that is not predicted in the literature: reputation risk of the borrower. I conclude that the New Bank project was a suboptimal allocation of financial resources to an imprudent lending institution, which might have been avoided by a better understanding and application of banking theory. My research leads me to believe this paper to be the first academic examination of New Bank’s ruin and the case itself to be the first documented example of a bank that allowed the process of adverse selection to continue until failure. It is a rare opportunity to observe how the lemon problem snowballs if subjected neither to commercial nor parliamentary oversight.

E-marketing under the adverse selection environment: model and case study

Information asymmetry in the e-commerce market causes an adverse selection phenomenon ('lemons' problem) that has a negative impact on e-marketing. Based on the classic adverse selection model, this paper set up e-marketing models. The models fully took into account the qualitative preference of e-consumers and the role of quality intermediaries under adverse selection environments. Actual data from Taobao serves as a case study to analyse the characteristics of adverse selection. The results show that reputation evaluation systems and business alliance system can reduce the adverse selection problem in e-commerce market. The quality intermediary as a trusted third party or market quality expert can help eliminate cyber lemons. However, along with the e-marketing strategy counteracting adverse selection, there are some phenomena strengthening consumers' distrust. This may result in a vicious cycle and affect the function of e-marketing. This paper analyses the existing issues and suggests solutions to enable e-sellers and e-buyers to trade credibly.

Signaling the Value of a Business Concept : Evidence from a Structural Model with Brazilian Franchising Data

Within the wide literature regarding franchising, a few studies were devoted to the adverse selection phenomena in the franchise relationships, and to the signaling explanation of the franchisors' organizational choices. Previous empirical works concluded that the signaling framework is not well adapted to study franchising. However, most of the empirical literature has focused on developed countries. This empirical paper deals with the case of Brazil. We estimate on recent franchising data a structural equation model capturing the simultaneous influences of a valuable business concept. The paper provides evidence that the signaling theory is adequate to understand the organizational choices regarding the ownership structure of franchised networks in emerging markets. The estimation results suggest indeed that the Brazilian franchisors use signaling devices, and that the necessity to signal the value of a business concept affects the organizational choices at the network level.

The optimal structure of PD buckets

In designing credit rating systems under the new Basel Accord, considerable effort has been devoted to rating assignment and quantification, while the choice of the optimal bucket structure has received less attention. To fill this gap, we propose two “bucketing” strategies based on constrained optimisation, paying attention to the implications of rating buckets for loan-pricing and adverse selection phenomena. We compare them with some more naïve approaches, based on a sample of about 100,000 European companies. We also analyse the persistence of our performance measures over time, as well as the effect of large exposures being associated with low-PD obligors.

The impact of quality uncertainty without asymmetric information on market efficiency

The market effects of quality variability and uncertainty have classically been studied in the particular context of asymmetric information, focusing on the sellers' expected behavior and the phenomenon of adverse selection. Looking instead at the consumers' expected behavior, this paper uses an agent-based model to illustrate how quality uncertainty by itself can lead to market failure, even in the absence of asymmetric information. Assuming that buyers estimate the quality of the product they buy on the basis of their experience from previous purchases, and considering quality estimation rules which are individually sensible and unbiased, this paper shows that market interaction with quality uncertainty generally produces underestimation of product quality as well as systematic drops in prices and losses of market efficiency. This study also shows that the spread of information through social networks can greatly mitigate this market failure.

The Economics of Standardized Contracts

In this paper I try explore some of the basic features of mass contracting. I believe that there are basically four characteristics of mass contracting: the reduced negotiations, the dissemination of standard form contracts, the presence of abusive clauses, and the recapitulation of the contract and its execution in a single act of stipulation. a) The reduction in negotiations is the result first of all of the costs that this activity requires and of the costs required to manage personalised contracts; secondly, this reduction is the consequence of the greater advantage of mass-produced goods compared to personalised goods; b) The affirmation of standard form contracts is a consequence not so much of a culpable inadequacy of legal provisions as of their objective inability to regulate all possible contractual relationships; c) The spread of one-sided clauses depends basically on a phenomenon of adverse selection, by virtue of which the bad clauses drive out the good ones. This adverse selection phenomenon is due to the information costs that consumers have to bear; d) The phenomenon of uno actu recapitulation of the contract's conclusion and execution is a consequence of the growing ineffectiveness of the instrument of legal means in controlling opportunistic behaviour, an ineffectiveness that leads operators to adopt other remedies suitable for pursuing the same purpose, i.e., those that are used to be called 'remedies of the state of nature', first among them the remedy of the simultaneous nature of the exchange.

Openness, productivity and allocation efficiency in ASEAN-4

One of the important elements related to the variation in the efficiency of investment and productivity is the role of openness. The relationships between openness and allocation efficiency as well as openness and productivity are linked with the adverse selection phenomenon in the developing countries and it has resulted in inefficient resource allocation and low TFP. Therefore, this paper is intended to investigate the impact of openness on allocation efficiency (Incremental Capital-Output Ratio (ICOR)) and productivity growth (TFP growth). Applying the Unrestricted Error Correction Model (UECM), it is found that openness has led to improvement in allocation efficiency, except for Indonesia. Openness has also contributed to technological upgrading for most of the countries in the study.

Testing for Asymmetric Information in the Automobile Insurance Market Under Rate Regulation

AbstractThis article examines whether adverse selection or moral hazard could be induced by rate regulation, which prohibits insurance companies from considering some attributes of drivers in setting premiums. Using an individual data set from a heavily regulated automobile insurance market, we arrived at several conclusions, as follows. First, no evidence of adverse selection or moral hazard is found in general: conditional on all the variables observed by insurer, the null hypothesis of independence between risk and coverage is not rejected at reasonable levels of statistical significance. Second, this result is robust in the sense that it holds under several empirical procedures and different definitions of risk and coverage. Third, we find that unobserved variables do not induce adverse selection: the null hypothesis that consumers in risky regions are more likely to purchase insurance is tested against the alternative and rejected. Our study supports the view that the adverse selection phenomenon exists only to a very limited extent in this market.

Containing the Promise of Insurance: Adverse Selection and Risk Classification

This essay extends to adverse selection the critical attention provided in prior work to moral hazard. Like moral hazard, adverse selection is an old insurance concept that was adopted, formalized and generalized by economists developing the economics of information. As with moral hazard, insurance economics has addressed the phenomenon of adverse selection largely from the insurers' point of view. This essay examines how insurers create and shape adverse selection. At least in the context of insurance risk classification, there is much to be gained in thinking of adverse selection as a 'dual' problem (similar to moral hazard), meaning that actions to address adverse selection problems can lead to the de-pooling effect that motivated the actions in the first place. The first part of the essay sets forth the case for understanding adverse selection as a dual problem and highlights alternatives to insurance risk classification. The second uses three historical examples to explore moral justifications for insurance risk classification. The three examples are the 19th century controversy over age-based pricing in fraternal insurance, the mid 20th century controversy over experience rating in unemployment insurance, and the late 20th century controversy over efforts to exclude battered women from life, health and disability insurance pools. These examples demonstrate that, rather than being a neutral, technical solution to a structural dynamic inherent in the insurance relationship, risk classification reflects moral commitments.

L’assurance des dépôts, un instrument de la régulation bancaire

Deposit insurance, an instrument of banks regulation After reminding of the economic justifications of bank regulation, this paper pays particular attention to one of the instruments of this regulation, the deposit insurance. While offering a protection to the depositors, the deposit insurance would allow to prevent bank runs and thus reduce the occurrence probability of a systemic crisis. We present the features of such a scheme identified as « optimal » in the academic literature in the sense that they avoid moral hazard and adverse selection phenomena. Thus, ideally, the system should be public and compulsory for all banks ; the guarantee should be limited and all-in price ; the premium paid by the banks should directly depends on each bank’s risk level. Classification JEL : G28

Deposit Insurance as a Tool for Banking Supervision

After reminding of the economic justifications of bank regulation, this paper pays particular attention to one of the instruments of this regulation, the deposit insurance. While offering a protection to the depositors, the deposit insurance would allow to prevent bank runs and thus reduce the occurrence probability of a systemic crisis. We present the features of such a scheme identified as « optimal » in the academic literature in the sense that they avoid moral hazard and adverse selection phenomena. Thus, ideally, the system should be public and compulsory for all banks ; the guarantee should be limited and all-in price ; the premium paid by the banks should directly depends on each bank’s risk level. JEL Classifications : G28

Fonctions et tarification d'un fonds de garantie bancaire

The purpose of this research is twofold : firstly, it presents the economic justifications for deposit insurance schemes as well as the features of such schemes identified as « optimal » in the literature in order to avoid moral hazard and adverse selection phenomena. Thus, according to the literature, deposit insurance should be limited, compulsory, universal and the fees paid by the banks should directly depend on each bank's risk level. Secondly, we test two alternative ways of calculation for the fees paid by the banks to the deposit insurance. The first method consists in drawing a comparison between the insurance fee and a put option, whose price may be calculated from each bank's investment risk. The second proposal relies on a model of banking behaviour wich determines a « socially optimal » insurance fee. Such a fee should indeed maximise the banks' profits when no bank fails and depositors indemnities when the bank is going bankrupt.