Title
When No One Learns, Everyone Can Coordinate: Public Signals in Dynamic Adverse Selection
Abstract
We consider a model with dynamic adverse selection and public news. We show that embedding simple return and buy-back options in spot sale contracts implements the full-information first-best allocation. Even if the public signal never fully reveals the seller’s private information, it remains critical for implementation. The signal serves as a coordination device that enables screening of informed agents and achieves separation at the initial stage. Strikingly, the signal’s correlation with the private information is essential for implementation, even though uninformed agents learn nothing from the signal. We apply the model to a buyer–seller setting, rationalizing the pervasive use of return options in online retail contracts.
Bio
Jacco is Professor of Mathematical Finance in the Department of Mathematics at the University of York, where he is also Deputy Head of Department (Teaching). He completed his PhD at Tilburg University in the Netherlands and is a Visiting Professor at ISEG, Lisbon School of Economics and Management (University of Lisbon). Jacco’s main research interests are in mathematical models of investment under uncertainty (real options) and, more recently, in dynamic models of asymmetric information and mechanism design. He sits on the Board of the Operational Research Society and chairs its Education Committee.