Adverse Selection Research Articles

The Influence of Product Signalling on Adverse Selection in Smartphone Market

The Influence of Product Signalling on Adverse Selection in Smartphone Market

Private health insurance incentives and passive adverse selection: is Lifetime Health Cover responsible for the excess ageing of Australia's hospital cover risk pool?

Objective Lifetime Health Cover (LHC) was introduced in mid-2000 to increase participation in private health insurance that includes hospital cover (PHI-HC) and improve the risk profile of PHI-HC participants. It initially achieved both objectives, but since 2001 the PHI-HC population has aged faster than the general population. The aim of this study was to determine if the excess ageing of the PHI-HC risk pool has been due to passive age-based adverse selection, an inherent risk of LHC. This study has potential implications for the retention of LHC. Methods A descriptive population-level analysis of publicly available administrative datasets was performed. Data relating to PHI-HC were obtained from the Australian Prudential Regulatory Authority. National population data were obtained from the Australian Bureau of Statistics. Trends in demography, PHI-HC participation rates and LHC loading payments were analysed. Results By 2021, age-based adverse selection had returned to the pre-LHC level. Based on the available data, this was due to passive age-based adverse selection not active age-based adverse selection. Specifically, it reflected the combination of an avoidable unintended consequence of the introduction of LHC (the over-representation, in 2001, of individuals aged 45-59) and one of LHC's intended effects (incentivisation of insured individuals to retain PHI-HC). Conclusions This study supports the retention of LHC. Nonetheless, it highlights the risk of passive age-based adverse selection created by incentivising insured individuals to retain PHI-HC in the presence of distortions in the age distribution of the PHI-HC risk pool. Early targeted interventions are required when such distortions arise.

Adverse Selection and (Un)Natural Monopoly in Insurance Markets

Adverse Selection and (Un)Natural Monopoly in Insurance Markets

Navigating Higher Education Insurance: An Experimental Study on Demand and Adverse Selection

Navigating Higher Education Insurance: An Experimental Study on Demand and Adverse Selection

Incentivizing Physicians' Diagnostic Effort and Test with Moral Hazard and Adverse Selection

Incentivizing Physicians' Diagnostic Effort and Test with Moral Hazard and Adverse Selection

Adverse Selection: A Comparative Analysis of Auto Insurance Regulations in France, the UAE, and the USA

Adverse Selection: A Comparative Analysis of Auto Insurance Regulations in France, the UAE, and the USA

Institutional Ownership and Stock Liquidity: Evidence From an Emerging Market

This research investigates whether institutional ownership contributes to enhancement of stock liquidity in emerging markets. The study examines data of listed companies on the Vietnamese stock market. Using a comprehensive data set for all stocks listed on Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX) from 2008 to 2017, the statistical findings consistently demonstrate that institutional ownership has a negative impact on stock liquidity. In other words, the empirical evidence supports the adverse selection hypothesis that the upward trend of institutional ownership could reduce stock liquidity because the institutional investors with superior and advantageous information could exacerbate informational asymmetry issues. By using a case study in Vietnam, this research makes an original contribution to the academic literature by examining the relationship between institutional investors and stock liquidity in emerging markets. In addition, this study offers policymakers, authorities, agencies, and managers some insightful recommendations and implications that will help to not only promote the active participations of professional institutions but also improve stock liquidity, fairness, and efficiency.

Comparative Analysis of Auto Insurance Regulations: Addressing Adverse Selection in Germany, UAE, and USA

Comparative Analysis of Auto Insurance Regulations: Addressing Adverse Selection in Germany, UAE, and USA

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.

Insurance Contracting with Adverse Selection and Moral Hazard

Most of the previous research in the asymmetric information problem treats adverse selection and moral hazard separately, though they may coexist and interact with each other. We build a principal-agent model to examine optimal contracts in a competitive insurance market facing adverse selection and moral hazard simultaneously. We apply the change-of-variable method and the Kuhn-Tucker conditions to solve the optimization programs. Our model yields richer separating Nash equilibria than pure moral hazard and pure adverse selection models, although separating Nash equilibria may not exist in some cases. It also retains some properties, for example, no full insurance and the positive correlation between insurance coverage and risk type, in those benchmark models. Our study on comparative statics indicates that, under some conditions and with some exceptions, the optimal indemnity and premium decrease with disutility from effort, increase with potential loss, and decrease with the initial wealth of the insured.

Determinants of Profitability and Risk-taking in Pakistani Commercial Banks: Dynamic GMM Approach

The study used interest rate, exchange rate and banks size as variables of study. The panel data of 22 Pakistan commercial banks about2009 to 2020, STATA Panel Ordinary Least Square (OLS) and general methods of moments (GMM) estimator is used, and results indicate that in Pakistani banks management efficiency is has high power over shareholder to make profits and involve in risk taking projects. Bank size increase highlights better performance but and a disadvantage to use funds in investments for future growth. Diversification in banks is not a helpful factor to bring change in risk portfolios during financial crises. The liquidity inverse relation causes less availability of resource to boost financial performance and default lending result in credit risk. High proportion of assets utilized for personnel expense raise risk-taking ratio for operation in Pakistan. Banks should avoid the adverse selection of risks with proper performance policy, as to safeguard from hostile economic situations.

Financial Inclusion Convergence in Low-Income and Lower-Middle-Income Countries

The study used interest rate, exchange rate and banks size as variables of study. The panel data of 22 Pakistan commercial banks about2009 to 2020, STATA Panel Ordinary Least Square (OLS) and general methods of moments (GMM) estimator is used, and results indicate that in Pakistani banks management efficiency is has high power over shareholder to make profits and involve in risk taking projects. Bank size increase highlights better performance but and a disadvantage to use funds in investments for future growth. Diversification in banks is not a helpful factor to bring change in risk portfolios during financial crises. The liquidity inverse relation causes less availability of resource to boost financial performance and default lending result in credit risk. High proportion of assets utilized for personnel expense raise risk-taking ratio for operation in Pakistan. Banks should avoid the adverse selection of risks with proper performance policy, as to safeguard from hostile economic situations.

Corporate bond price reversals

I demonstrate empirically that corporate bond dealers mitigate adverse selection risk by passing potentially informed transactions to institutional investors. I contrast price reversals following days with abnormal trading volume across bonds with different information asymmetry. In informed trading, the part of reversal specific to high-volume days should increase with information asymmetry. In uninformed trading, there is no such effect. Following high-volume days when investors provide liquidity, the reversals are consistent with the former case. When dealers provide liquidity, I observe the latter. The results suggest that the informational content of bond prices is higher when dealers do not take inventory.

Toward a positive compensation policy for rail transport via mechanism design: The case of China Railway Express

This paper addresses one of the key challenges in the China Railway Express (CR Express) service industry, which is the asymmetry of information between the government and a CR Express operator. We formulate the CR Express service delivery problem with asymmetric information and other unique characteristics as the incentive compensation problem via the principal-agent approach. This is the first paper to develop an incentive-compatible (IC) compensation mechanism to improve CR Express service in the presence of adverse selection and moral hazard. Compared to the generic form of compensation, this paper proves that such an IC scheme with a linear compensation contract is optimal. Our optimal compensation mechanism provides a “positive incentive”, where the monetary compensation is higher for the CR Express operator with lower operating costs, as opposed to the current compensation policy, which can create a “negative incentive”. We find both underestimation and underinvestment problems, which become smaller when the CR Express operator's gross margin is relatively high. When the CR Express service level is discrete-valued, it is optimal to adopt a fixed compensation scheme. Finally, in the scenario with multiple CR Express operators, we propose a generalized Vickrey (GV) auction, which implicitly obtains both true gross margin and service level. The compensation offered by the government is indeed negative in the case of GV auction. Surprisingly, in this scenario, we find problems of both underestimation and overestimation.

Does brand capital improve stock liquidity? Evidence from China

AbstractThis study investigates how brand capital affects stock market liquidity. We posit that brand capital improves the corporate information environment, enhances competitiveness, and increases firm visibility ultimately resulting in higher stock liquidity. Using a sample of Chinese listed firms, we find a positive relationship between brand capital and stock liquidity. Further analyses show that the effect of brand capital is more pronounced for firms with low media coverage and analyst following. Moreover, the effect of brand capital on stock liquidity is significant for non‐state‐owned enterprises. Our mechanism analyses also confirm that brand capital plays an informational role by effectively mitigating information asymmetry and adverse selection, leading to higher stock liquidity. Our study provides the first evidence of the nexus between brand capital and stock liquidity and extends the literature on the capital market implications of brand capital.

The joint determination of the payment method and the bid premium in M&As: What is the role of firm opacity?

AbstractThis paper investigates how private information affects the joint determination of the payment method and the bid premium in M&As. The focus is on the uncertainty of the stand‐alone valuations of the firms involved in the transaction induced by their opacity. First, we model M&A negotiations as a signalling game with two‐sided private information and derive correlations between firm opacity and bid characteristics from equilibrium analysis. Then, we analyze a sample of U.S. deals, using an index based on market measures of adverse selection to quantify firm opacity. We find that the likelihood of stock offers and the bid premium increase with the target's opacity, while more opaque bidders are associated with fewer stock offers and smaller bid premiums.

Stress tests and model monoculture

We study whether regulators should reveal stress test results that contain imperfect information about banks' financial health. Although disclosure restores market confidence in banks, it misclassifies some healthy banks as risky. This encourages banks to choose portfolios deemed safe by regulators, leading to model monoculture and making the financial system less diversified. Under the ex-ante optimal disclosure policy, the regulator addresses this tradeoff by fully revealing stress test results when adverse selection is very severe or very mild, but never disclosing the results otherwise.

Unravelling the determinants of family firms' governance: the family protocol

PurposeFamily businesses are essential to the global economy but often grapple with family-related issues, especially during succession. This study explores how governance tools like the family protocol (FP) mitigate conflicts by setting standards for family firm management and continuity. Pioneering the use of game theory and adverse selection setups in family business governance, this research uncovers FP determinants.Design/methodology/approachThis research employs game theory and adverse selection setups to delve into the strategic decision-making processes of stakeholders in family firms. The authors break new ground by applying principal–agent theory (PAT) to family business governance structures. This innovative approach uncovers the determinants of the FP, enhancing the authors’ understanding of family firm dynamics.Findings The authors emphasize the importance of custom governance structures, such as the FP, in managing complex family-business interactions. These structures mitigate conflicts and promote smoother transitions during succession, ensuring family firm continuity. This study identifies key determinants, and these results will aid founders, families and practitioners in achieving smoother transitions, ensuring family firm continuity.Originality/valueThis research pioneers game theory and PAT applications in family business governance, shedding light on the effectiveness of customized governance mechanisms. By identifying FP determinants, the authors contribute to a deeper understanding of family firm dynamics. The findings have practical implications for founders, families, practitioners and consultants, promoting the long-term success and harmony of family firms in the global economy.

Effects of private health insurance on healthcare services during the MERS Pandemic: Evidence from Korea

This study investigates how private health insurance impacted healthcare services during the MERS pandemic in Korea. Using the Korea Health Panel Study (KHPS), this study examines the difference in healthcare utilization between insured and uninsured individuals during the pandemic. If insured individuals use fewer healthcare services than the uninsured during the MERS pandemic, it could be evidence of moral hazard. During the MERS outbreak, the probability of outpatient medical services utilization was lower by 19 % than during non-pandemic periods. All individuals decreased the number of outpatient visits by 7 %. Insured individuals reduced outpatient visits more than the uninsured in response to the MERS pandemic. The increased outpatient utilization by private health insurance could be attributed to both moral hazard and adverse selection. However, given that people with poor health cannot enroll in private health insurance due to the insurance company's screening process, moral hazard leads to increase healthcare utilization rather than adverse selection.

Buying winners

Two principals with heterogenous budgets compete to buy the best agent (the winner). First, the principals make initial offers to the agents before the winner is known. Then, if the winner has not accepted any offer, the principals make a second round of offers after the winner is revealed. In equilibrium, the principal with the higher budget offers her entire budget to the winner after he is revealed. The principal with the lower budget makes an offer to one agent before the winner is revealed. The timing of offers favors the high-budget principal: the low-budget principal faces adverse selection because only an agent with a low win probability accepts her offer. Moreover, the probability that the high-budget principal buys the winner increases with the number of agents. Finally, limiting pre-revelation offers favors the high-budget principal, while the opposite is true for post-revelation limits.