I think that part of the explanation for why the counterfactual marginal immigrant with expanded immigration would be substantially worse *is* adverse selection. When you reduce the degree to which you vet offers, you should expect the (marginal) proportion of instances of adverse selection to increase, since vetting is the one lever you…
I think that part of the explanation for why the counterfactual marginal immigrant with expanded immigration would be substantially worse *is* adverse selection. When you reduce the degree to which you vet offers, you should expect the (marginal) proportion of instances of adverse selection to increase, since vetting is the one lever you have available to pull to decrease adverse selection.
Put another way: I think an essential lesson of adverse selection is "the person who is putting an offer on the book (the market maker) is at a disadvantage because the people looking at the book (the market takers) can see the offer and decide (with the information that the offer is on the book) whether to take it or not.” This is why you should always expect market makers to show spreads; it’s also the advantage of being “in position” in poker. But if you’re the taker, you give up this “taker’s advantage” if your strategy for taking is "lift every offer on the book" (much like how you don’t have an advantage “in position” if your strategy is to call everything). If that is your strategy (and if it is well-known that that is your strategy), then you're the one who is extremely vulnerable to adverse selection, because your strategy is equivalent to putting a permanent bid of +infinity on the book!
(This is adapted from an email I wrote to Prof. Caplan expanding slightly on my post above.)
I think that part of the explanation for why the counterfactual marginal immigrant with expanded immigration would be substantially worse *is* adverse selection. When you reduce the degree to which you vet offers, you should expect the (marginal) proportion of instances of adverse selection to increase, since vetting is the one lever you have available to pull to decrease adverse selection.
Put another way: I think an essential lesson of adverse selection is "the person who is putting an offer on the book (the market maker) is at a disadvantage because the people looking at the book (the market takers) can see the offer and decide (with the information that the offer is on the book) whether to take it or not.” This is why you should always expect market makers to show spreads; it’s also the advantage of being “in position” in poker. But if you’re the taker, you give up this “taker’s advantage” if your strategy for taking is "lift every offer on the book" (much like how you don’t have an advantage “in position” if your strategy is to call everything). If that is your strategy (and if it is well-known that that is your strategy), then you're the one who is extremely vulnerable to adverse selection, because your strategy is equivalent to putting a permanent bid of +infinity on the book!
(This is adapted from an email I wrote to Prof. Caplan expanding slightly on my post above.)