2026 General Seminar no. 11 - Andy Zapechelnyuk (Edinburgh)

Title: Disclosure of causal vs. correlational information in markets with correlation neglect

by Andy Zapechelnyuk and Dimitri Migrow

Abstract:  We study disclosure of consumer information in competitive risk-sharing markets when consumers neglect correlation. Disclosure of a consumer trait mitigates adverse selection, thus improving welfare. It also leads to distorted risk assessment and incorrect participation decisions by consumers due to their lack of understanding of correlation, thus reducing welfare. The net effect on welfare depends on whether the trait's causal or correlational effect on consumer's risk dominates. Stronger causal effect entails more reduction of adverse selection and less distortion of consumers' risk assessment. Thus, our results highlight that causal effects support transparency, while correlational effects may justify privacy protection.