Kym Pram (EUI)

“Hard Evidence and Welfare in Adverse Selection Environments”

abstract

I consider environments in which an agent with private information can acquire arbitrary hard evidence about his type before interacting with a principal. In a broad class of screening models, I show that there is always an equilibrium which interim Pareto-improves over the no-evidence benchmark whenever some types of the agent take an outside option in the benchmark case, and additional weak conditions, including either a single-crossing condition or state-independence of the principal’s payoffs, are satisfied. I show that the sufficient conditions are tight and broadly applicable. Addressing concerns about multiple equilibria, I show how a planner can restrict the available evidence to ensure that an equilibrium which interim Pareto-improves over the benchmark case is obtained. In the special case where a buyer with a unit valuation faces a monopolist I characterize an optimal evidence structure with a simple recursive form.