We study government interventions in markets suffering from adverse selection. Importantly, asymmetric information prevents both the realization of gains from trade and the production of information that is valuable to other market participants. We find a fundamental tension in maximizing welfare: while some intervention is required to restore trading, too much intervention depletes trade of its informational content. We characterize the optimal policy that balances these two considerations, and explore how it depends on features of the environment. Our model can be used to study a program introduced in 2009 to restore information production in the market for legacy assets.

We analyze commitment to employment in an environment in which an infinitely lived firm faces a sequence of finitely lived workers who differ in their ability. A worker’s ability is initially unknown, and a worker’s effort affects how informative about ability the worker’s performance is. We show that equilibria display commitment to employment only when effort has a delayed impact on output. In this case, insurance against early termination encourages workers to exert effort, thus allowing the firm to better identify workers’ ability. Our results help explain the use of probationary appointments in environments in which workers’ ability is uncertain.

We use unique longitudinal data to provide direct evidence about interracial friendships at different stages of college and to provide new evidence about some of the reasons for the observed patterns of interaction. We find that, while much sorting exists at all stages of college, black and white students are, in reality, very compatible as friends; randomly assigned roommates of different races are as likely to become friends as randomly assigned roommates of the same race. Further, we find that, in the long run, being (randomly) assigned a black roommate significantly increases the number of other black friends a white student has.

We study government interventions in markets suffering from adverse selection. Importantly, asymmetric information prevents both the realization of gains from trade and the production of information that is valuable to other market participants. We find a fundamental tension in maximizing welfare: while some intervention is required to restore trading, too much intervention depletes trade of its informational content. We characterize the optimal policy that balances these two considerations, and explore how it depends on features of the environment. Our model can be used to study a program introduced in 2009 to restore information production in the market for legacy assets.