Much of what we work on involves information in markets. Transaction costs, information asymmetries feature large in our work. We hope to address insurance in our future work. In all these areas, Kenneth Arrow’s influence is immense. We mourn his passing.
Professor Arrow anticipated the modern analysis of markets in which buyers and sellers do not share accurate information (now known as markets with asymmetric information). In a strikingly prescient article published in the early 1960s, he teased apart the complexities that asymmetric information creates in the market for health insurance. He pointed to incentives for patients and their physicians to agree to medical procedures of questionable value when a third party, the insurer, pays the bills.
Professor Arrow’s work spawned the modern treatment of “moral hazard,” whereby the fact of the purchase of insurance systematically affects the behavior of the parties to the contract.