Data and Incentives
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Many firms, such as banks and insurers, condition their level of service on a consumer's perceived "quality," for instance their creditworthiness. Increasingly, firms have access to consumer segmentations derived from auxiliary data on behavior, and can link outcomes across individuals in a segment for prediction. How does this practice affect consumer incentives to exert (socially-valuable) effort, e.g. to repay loans? We show that the impact of an identified linkage on behavior and welfare depends crucially on the structure of the linkage—namely, whether the linkage reflects quality (via correlations in types) or a shared circumstance (via common shocks to observed outcomes).
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