This paper studies optimal information disclosure in dynamic insurance economies with income risk in which an incumbent firm acquires more information about a consumer's persistent type than the rest of the market does. We find that if the incumbent can commit to long-term contracts but the consumer can walk away, the optimal disclosure prescribes no information revelation to maximize cross-subsidization. However, if the incumbent lacks commitment, no cross-subsidization of low-income consumers is feasible for any public information disclosure because of adverse selection. We show that partial information disclosure is typically optimal and it aims at implementing intertemporal consumption smoothing between the first period and the high-state in the second period, generating an inverse of the back-loading result in Harris and Holmstrom (1982). Lastly, we show that, without commitment, banning long-term relations can be beneficial to consumers. Our results can be used to analyze the consequences of policy proposals such as open banking and consumer data ownership.
Authors
- Acknowledgements & Disclosure
- The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w33051
- Pages
- 62
- Published in
- United States of America
Table of Contents
- Introduction 3
- Insurance economy 9
- Equilibrium outcome in period 2 11
- One-sided commitment 14
- Two-sided lack of commitment 17
- Optimal public disclosure policy 20
- Discussion 25
- Long-term vs. short-term contracts 28
- Ex-post competition and switchers 33
- Conclusion 39
- Model 44
- Type interpretation 44
- Credit economy 45
- Omitted proofs 46
- Proof of Lemma 1 46
- Proof of Proposition 2 47
- Proof of Lemma 5 50
- Proof of Lemma 8 51
- Proof of Proposition 4 52
- Convexity of K 54
- Observed outcome and unobserved signals 56
- Discrimination across consumers 58
- Effort 60
- Environment 60
