Essays on Information Economics

Abstract

This thesis is both an empirical and a theoretical study of how imperfect information affects economic decision making and how to measure those effects. The first chapter describes a new method for testing and measuring moral hazard in insurance contracts for which panel data is available. The method is able to measure moral hazard separately from adverse selection. It uses the variation in risk over different objects with different levels of insurance owned by the same person to isolate the average effect that insurance coverage has on precautionary effort. The method requires relatively weak symmetry between the items and applies to a large variety of standard contracts. The second chapter builds on the first chapter by utilizing the time dimension of panel data to measure moral hazard. I discuss how many every-day contracts imply different incentives to reduce risks at different times over the span of the contract. These differences can be used to measure how sophisticated agents are in allocating precautionary effort over time. I also discuss how the method presented in this chapter can be combined with the method from first chapter to obtain an identification strategy that is highly robust to alternative explanations. I apply each of my methods to a detailed insurance data set of virtual space ship insurance from a large virtual world called EVE Online and find strong evidence of moral hazard. The third chapter (with Nemanja Antic) is a theoretical study of an alternating offers bargaining model where the players have private information about their own deadline after which they have to accept any non-negative offer. Such situations arise, for example, when a firm is bargaining with its employees and both sides are facing fixed costs and finite budgets. We show that the game has an intuitive screening equilibrium with delay. The equilibrium is wasteful in the strict sense that both players would prefer to commit to reveal their private information if such commitment device was available. The equilibrium highlights the potential benefits from third-party arbitration assuming that it helps players to commit to revealing private information.