Helping consumers know themselves

Authors: Emir Kamenica, Sendhil Mullainathan, and Richard Thaler (2011)

Abstract: In standard models with asymmetric information, the parties involved are assumed to have private information about their own characteristics. In the health insurance market, for example, customers are typically assumed to know more about their health status than insurers do, and if the customers use this information in deciding whether to buy insurance, we have a classic case of adverse selection. Modern data-gathering technologies, however, can reverse this situation. For example, because cell-phone providers keep and analyze detailed records, they can know more about a consumer’s expected usage than the customer herself does. Similarly, a credit card company may know more about a customer’s probability of incurring a late fee than the customer herself.

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