Adverse and Advantageous Selection in the Laboratory

72 Pages Posted: 13 Sep 2019

See all articles by S. Nageeb Ali

S. Nageeb Ali

Pennsylvania State University

Maximilian Mihm

New York University (NYU) - Abu Dhabi

Lucas Siga

New York University (NYU) - Abu Dhabi

Chloe Tergiman

The Pennsylvania State University

Date Written: September 4, 2019

Abstract

Asymmetric information plays an important role in markets and politics. When parties are asymmetrically informed and have misaligned preferences, they may be hurt by adverse selection. By contrast, if parties know that their preferences are aligned, they may benefit from advantageous selection. Using a laboratory experiment, we investigate the degree to which individuals account for adverse and advantageous selection. By comparing behavior in a game in which subjects are asymmetrically informed with behavior in a game where those same subjects are symmetrically uninformed, we find evidence that a significant fraction of subjects account for these selection effects. We find that removing strategic uncertainty significantly increases the fraction of subjects who account for selection effects. Across our treatments, we find that subjects account for adverse selection to a greater degree than they account for advantageous selection. In addition, we find that a sizable fraction of subjects who do not behave according to predictions are in fact able to understand selection effects but do not apply that knowledge.

Keywords: Laboratory experiment, adverse selection, advantageous selection, contingent reasoning, strategic uncertainty, voting, social preferences.

JEL Classification: C91, C92, D72, D81, D82

Suggested Citation

Ali, S. Nageeb and Mihm, Maximilian and Siga, Lucas and Tergiman, Chloe, Adverse and Advantageous Selection in the Laboratory (September 4, 2019). Available at SSRN: https://ssrn.com/abstract=3448457 or http://dx.doi.org/10.2139/ssrn.3448457

S. Nageeb Ali (Contact Author)

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

Maximilian Mihm

New York University (NYU) - Abu Dhabi ( email )

Abu Dhabi
United Arab Emirates

Lucas Siga

New York University (NYU) - Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

Chloe Tergiman

The Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

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