TY - JOUR
T1 - Reputation for quality and adverse selection
AU - Kawai, Keiichi
N1 - Funding Information:
I am indebted to my committee members Jeffery Ely, Wojciech Olszewski, and Asher Wolinsky for their continuous support and guidance. I also wish to thank Pak Hung Au, Michael Fishman, Daniel Garrett, Toomas Hinnosaar, Richard Holden, Nenad Kos, and the other seminar participants at the Australian Economic Theory Workshop, Kyoto University, National University of Singapore, Nanyang Technological University, Northwestern University, the University of Bonn, the University of British Columbia, the University of Mannheim, the University of New South Wales, the University of Queensland, and Yale-NUS for their many helpful comments. I owe much to an associate editor and two anonymous referees for their very detailed comments on previous drafts of this article. I acknowledge with gratitude financial support from the Center for Economic Theory of the Economics Department of Northwestern University, and the University of Queensland.
Publisher Copyright:
© 2015.
PY - 2015/5/1
Y1 - 2015/5/1
N2 - We analyze a dynamic market with a seller who can make a one-time investment that affects the returns of tradable assets. The potential buyers of the assets cannot observe the seller's investment prior to the trade or verify it in any way after the trade. The market faces two types of inefficiency: the ex-ante inefficiency, i.e., the seller's moral hazard problem, and the ex-post inefficiency, i.e., inefficient ex-post allocations due to the adverse selection problem. We analyze how the observability of information by future buyers, through which the seller builds a reputation, affects the two types of inefficiency as well as the interplay between them.
AB - We analyze a dynamic market with a seller who can make a one-time investment that affects the returns of tradable assets. The potential buyers of the assets cannot observe the seller's investment prior to the trade or verify it in any way after the trade. The market faces two types of inefficiency: the ex-ante inefficiency, i.e., the seller's moral hazard problem, and the ex-post inefficiency, i.e., inefficient ex-post allocations due to the adverse selection problem. We analyze how the observability of information by future buyers, through which the seller builds a reputation, affects the two types of inefficiency as well as the interplay between them.
KW - Adverse selection
KW - Moral hazard
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U2 - 10.1016/j.euroecorev.2015.02.001
DO - 10.1016/j.euroecorev.2015.02.001
M3 - Article
AN - SCOPUS:84924199171
SN - 0014-2921
VL - 76
SP - 47
EP - 59
JO - European Economic Review
JF - European Economic Review
ER -