Source Of Asymmetric Information Research Articles

Diversification of procedural and administrative costs and innovation: Some firm-level evidence

We examine the diversification of administrative and procedural costs on patent stock using a large dataset from the European Patent Office with 15,000 firms for the period between 1995 and 2015. The results reveal that administrative and procedural costs are significant for firm-level patenting activity. However, not all administrative and procedural costs have equal effects. Higher administrative costs often encourage patent application and validation by solving the adverse selection problem and short-run opportunism, as well as other sources of asymmetric information. The effective administration of intellectual property law and low-cost enforcement are found to considerably foster patenting activity. The effects are robust for various mis-specification checks and do not disappear once country-level research and development infrastructure proxies are controlled for. The extreme bounds of administrative and procedural costs are computed across more than 5 billion regressions, and the sizeable impact of administration on patent application and validation outcomes is confirmed.

Asymmetric Information and Market Collapse: Evidence from the Chinese Market

In this paper, using data for the period January 1995 to May 2009 for the Shanghai stock exchange (SHSE), we show that aggregate illiquidity is a priced risk factor. We develop the relationship between the illiquidity factor, asymmetric information, and market collapse. Our empirical results show that while the illiquidity factor is a source of asymmetric information on the SHSE, asymmetric information does not trigger a market collapse.

Moral Hazard and Learning in the Tunisian Automobile Insurance Market: New Evidence from Dynamic Data

The main contribution of this paper is that it empirically studies the existence of asymmetric information in the Tunisian automobile insurance market. It also investigates the possibility of distinguishing moral hazard from adverse selection and asymmetric learning. To this end, we investigate the dynamics of insurance-coverage choices and of the occurrence of automobile claims, considering the bonus–malus mechanism, to identify the source of asymmetric information. Using a recent longitudinal data-set for 2008, 2009 and 2010 from one of the major insurance companies in Tunisia, our empirical results provide evidence for a significant positive correlation between claims occurrence and coverage choice. The results from using parametric and non-parametric tests provide evidence of residual asymmetric information among experienced drivers, while this asymmetry vanishes for beginner drivers. In a dynamic context, our empirical findings provide evidence of moral hazard. However, we do not find evidence of asymmetric learning.

Working Hours, Promotion and the Gender Gap in the Workplace

This paper presents a novel model of promotion within the firm which sheds new light on the interplay between working hours and the odds of subsequent promotion. The model's key feature is the coexistence of two different sources of asymmetric information: (i) the worker's cost of long working hours: and (ii) the worker's OJT ability (the worker's ability to accumulate valuable human capital on the job through learning by doing). The worker's cost of working long hours is known only to the worker, while the worker's OJT ability is accurately assessed only by the firm observing him/her on the job. Long working hours signal the worker's commitment to the firm, which determines the surplus produced when the worker is promoted. Thus, the firm provides the worker with managerial training only after observing the employee's hours worked, a signal of his/her commitment to the firm or lack thereof. The firm's decision to provide training also depends on its private information about the worker's OJT ability, which affects his/her future productivity if and when the worker gets promoted. Upon completion of training, the firm then promotes the worker. The model illuminates under what conditions, it is efficient for the firm to adopt the information revelation strategy – reveal its private information on the worker's OJT ability to him/her before the worker decides on whether to work long hours and signal his/her commitment. Using the model, we show that under a reasonable set of conditions, the firm may find it optimal to adopt the information revelation strategy for women but not for men, and derive an empirical testable hypothesis that the correlation between working hours and subsequent promotion will be stronger for women than for men. We analyze longitudinal personnel data from a large Japanese manufacturing firm and provide rigorous econometric evidence in support of the hypothesis.

Litigation with judgment proof defendants

We consider a model of litigation in which some defendants have insufficient assets to pay a judgment at trial. Because the defendant’s assets are not observable, this serves as a source of asymmetric information which leads to trials in the equilibrium of the model. Unlike many other types of informational asymmetry, the defendant’s assets are not generally subject to discovery and it may be difficult to credibly establish a lack of assets in a voluntary disclosure. Thus, this is a source of asymmetry between the parties which is likely to persist in the presence of these institutions. This suggests that this particular asymmetry is a potentially important explanation for settlement failure, at least in a subset of cases. We describe three possible equilibria in the model with asset constrained defendants. The constrained equilibrium is consistent with high dispute rates between the plaintiff and defendant. The model suggests that fee shifting will either have no effect on the incidence of trial or will increase it.

Does the Federal Reserve have Private Information about its Future Actions?

This paper contributes to the ongoing debate about the existence and source of asymmetric information between the Federal Reserve and the public by examining the federal funds rate forecasts. It compares the Federal Reserve federal funds rate forecasts with the predictions of alternative forecasting models and forecasts from the futures market for federal funds. The results show that the Federal Reserve has superior information about its own future policy actions, the future federal funds rate. The results are robust to alternative specifications.

Using the Variation in Transaction Costs to Explain the Propensity to Patent: Some Firm-Level Evidence

Do lower transaction costs induce innovation? We exploit the variation in transaction costs across firms and countries to explain the firm-level propensity to innovate. Drawing on a large dataset from European Patent Office (EPO) covering over 15,000 firms from 100 countries over the period 1991-2015, we compute the conditional probabilities of individual firms to acquire a valid based on the validation outcomes and examine whether lower transaction costs encourage firm-level innovation. Our empirical strategy addresses firm-level idiosyncrasies, country-level unobserved effects and common technology shocks that potentially invoke omitted variable bias in the effects of transaction costs on the propensity to patent. Numerous indicators of transaction costs are clustered into four specific categories: (i) Shleifer-La Porta (administrative), (ii) Northian (cross-border), (iii) Coasean (procedural & contractual) and (iv) Williamsonian (intra-firm). Our investigation reveals that higher transaction costs systematically account for the failure of firms to acquire a valid patent and to innovate. The results plausibly indicate that higher costs across firms and countries are associated with a marked drop in firm-level propensity to patent. Controlling for unobserved heterogeneity across firms, we employ the negative binomial model to examine the contribution of transaction costs to firm-level patenting propensities. The evidence suggests that not all transaction costs are created equal. Higher administrative transaction costs are associated with persistently higher number of valid patents as such costs tend to address moral hazard, opportunistic behavior and other sources of asymmetric information and potentially deter copy-cat imitating firms from entry. On the other hand, decreasing cross-border, procedural and intra-firm transaction costs leads to consistently higher number of valid patents being granted. The estimated propensities to patent are further tested using extreme bounds analysis by running more than 13 million combinations of the core regression model which confirms the importance of transaction costs in explaining differential propensities to patent across firms and countries.

Litigation with Judgment Proof Defendants

We consider a model of litigation in which some defendants have insufficient assets to pay a judgment at trial. Because the defendant’s assets are not observable, this serves as a source of asymmetric information which leads to trials in the equilibrium of the model. Unlike many other types of informational asymmetry, the defendant’s assets are not generally subject to discovery and it may be difficult to credibly establish a lack of assets in a voluntary disclosure. Thus, this is a source of asymmetry between the parties which is likely to persist in the presence of these institutions. This suggests that this particular asymmetry is a potentially important explanation for settlement failure, at least in a subset of cases. We describe three possible equilibria in the model with asset constrained defendants. One equilibrium is consistent with high dispute rates between the plaintiff and defendant. The model suggests that fee shifting will either have no effect on the incidence of trial or will increase it.

Making Collusion Hard: Asymmetric Information as a Counter-Corruption Measure

We study the problem of a principal who relies on the reports of a monitor to provide incentives to an agent. We allow for collusion, so that the agent and monitor can side-contract on what report to send. We show that the principal can benefit from creating endogenous asymmetric information between the agent and the monitor, thereby making side-contracting more difficult. Specifically, it may be optimal to randomize the incentives given to the monitor, and let the magnitude of her incentives serve as her private information vis a vis the agent.Plausible numerical computations in simple environments suggest that the potential efficiency gains from random incentives can be large. However, in general, the optimality of random incentives will depend on patterns of pre-existing asymmetric information: it is not always effective to add new sources of asymmetric information. We solve for both the Bayesian and max-min optimal policies, as well as provide an experiment-ready framework for prior-free policy evaluation. We show that even though monitors' reports do not provide a reliable measure of actual corruption, it is possible to evaluate local policy changes using only unverified report data.

Renegotiation-Blocking

Renegotiation of contractual agreements may lead to distortion of ex-ante incentives and inefficiencies. However, this problems can be circumvented in a credible way by the use of financial claims. The contracting parties ask financial markets (external claimants) to issue financial claims which are redeemable in the event of renegotiation. If the contracting parties do not know exactly how many claims have been issued, then this source of asymmetric information causes the failure of any renegotiation attempt. Moreover, by construction, the renegotiation blocking process does not generate additional inefficiency.

Asymmetric Information and Market Decline: Evidence from the Chinese Market

In this paper, we show that aggregate illiquidity is a priced risk factor on the Shanghai Stock Exchange (SHSE). We develop the relationship between the illiquidity factor, asymmetric information, and market decline. Our empirical results show that while the illiquidity factor is a source of asymmetric information on the SHSE, asymmetric information does not trigger market decline.

Know Thyself: Federal Reserve Information About its Own Future Actions

This paper contributes to the ongoing debate about the existence and the source of asymmetric information between the Federal Reserve and the public by examining the federal funds rate forecasts. It shows that the Federal Reserve has superior information about its own future policy actions, the future federal funds rate. It compares the Federal Reserve forecasts with the predictions of alternative forecasting models and forecasts from the futures market for federal funds. It also displays that the source of the private information of the Federal Reserve about inflation is its superior knowledge about its own policy actions.

Evaluating the effects of asymmetric information in a model of crop insurance

Asymmetric information in the form of moral hazard and adverse selection can result in sizable program costs for government‐provided crop insurance plans. We present a methodology and illustrative simulations to show how these two types of information problems interact in a way to create program costs for the providers of crop insurance. Our methodology allows us to ascertain the relative contributions to program costs of these two sources of asymmetric information. The exercise is useful in pointing out directions for future study seeking ways to improve the design of crop insurance plans.

A SEMI‐PARAMETRIC MODEL FOR ASYMMETRIC INFORMATION IN HEALTH PLAN MARKETS

Two sources of asymmetric information in health markets are adverse selection where only individuals know their illness probability and their preventive effort to reduce illness probabilities. This effort is not observed by insurers, and thus individuals cannot be adequately compensated for their effort. I investigate whether asymmetric information plays a role in health care markets through a semi‐parametric model that allows both adverse selection and preventive effort. I find that preventive effort plays a role in illness probabilities. If the United States implements universal health coverage, the currently uninsured population will exert less preventive effort, and their illness probabilities will increase. (JEL I11, C14)

Strategic Decision Making of the Firm Under Asymmetric Information

This paper develops a simple signaling model whereby high valuation firm uses levels of investment, debt and dividends to convey information to the market regarding its valuation. Conditions are determined under which investment, debt and dividends are employed in a separating Nash equilibrium. Unlike many other signaling models where the source of asymmetric information concerns only the mean of the firms' cash flow, our model allows for two sources of asymmetric information: the mean and the variance of the cash flow. This paper finds that the choice of signals depends on the relative importance of these two sources of informational asymmetry. For example, we show that high valued firms signal their values by decreasing their debt if the source of asymmetric information is mainly driven by the variance of the cash flows. This latter result differs from the debt signaling models found in the literature. The findings of this paper are consistent with extensive empirical evidence.

Entrepreneurship, asymmetric information, and unemployment

We examine how three sources of asymmetric information affect the supply of entrepreneurs and unemployment. In the first case, banks cannot observe entrepreneurs' risk of failure so ration credit. This increases the number of entrepreneurs and the level of unemployment. In the second case, firms cannot observe workers' effort so offer a wage above the market clearing one. This results in unemployment and too few entrepreneurs. The final case arises when firms cannot observe workers' abilities. A pooling wage is offered and results in too many entrepreneurs. The role of government in restoring efficiency is explored.