Essays on Asymmetric Information

This dissertation consists of three essays on the role of asymmetric information in economics. The central theme is on how asymmetric information, which can arise either exogenously or endogenously, have important implications on welfare and market design. Chapter 1 is entitled Within-Household Selection in the Health Insurance Market. This chapter studies the existence of adverse selection in Vietnam's Social Health Insurance program and how household decision making affects individual enrollment into insurance. I find that while there is a strong evidence of adverse selection at the individual level, selection into insurance happens both \emph{across} and \emph{within} households. I then explore different household factors that affect the selection of health insurance within the household such as the household's ability to share risk and within-household bargaining power. These findings have important policy implications for two reasons. First, in the presence of household decision making, price discrimination policy to reduce adverse selection at the individual level such as age-based pricing might not always be welfare improving. Second, any policy that attempts to generate pooling beyond the level sustained by the private market can distort the household's incentive to buy health insurance and worsen adverse selection for the rest of the market. Chapter 2 is entitled Household Bundling to Reduce Adverse Selection: Application to Social Health Insurance. This chapter explores the use of bundling to reduce adverse selection in insurance markets and its application to social health insurance programs. When the choice to buy health insurance is made at the household level, bundling the insurance policies of household members eliminates the effect of adverse selection \emph{within} a household since the household can no longer select only sick members to enroll. However, this can exacerbate adverse selection \emph{across} households, as healthier households might choose to drop out of the insurance market. The net effect of this trade-off depends on the characteristics of the household demand for medical care and risk preferences. I explore this issue using individual survey data on insurance enrollment and medical spending in Vietnam that contain detailed information about the structure of the household. I develop and estimate a model of household insurance bundle choice and medical utilization that accounts for these features. The results suggest that much of the adverse selection is concentrated within the household. Counterfactual analysis reveals that under optimal pricing, household bundling yields significantly higher consumer surplus and insurance enrollment than individual purchase. Furthermore, the insurance market is less susceptible to complete unraveling under household bundling. Chapter 3 is entitled Information Control in the Hold-up Problem, and it is a joint work with Teck Yong Tan. In this chapter, we study the use of information control to mitigate hold-up risks. Our main result identifies a separation between information that creates ex-ante investment incentive and information that causes ex-post inefficiency, which then allows ex-post inefficiency to be eliminated without compromising the ex-ante investment incentive. We characterize the properties of the optimal information structure and the investment levels and welfare achievable with information control in the presence of hold-up risks.