(8) Adverse Selection and Signaling Flashcards

1
Q

Principal-Agent Models - Definition

A
  • Principle hires the agent to perform a task

- The principles designs a contract to govern the relationship between himself and the agent

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2
Q

What are the problems regarding principal agent models?

A
  • The interaction has the potential to create surplus (win-win) but the principal has incomplete information
  • Hidden Information: Principal may not know the agents ‘s characteristics (his abilities)
  • Hidden Action: Principal may not know what the agent is doing (his work effort)
  • Result: There is a conflict of interest
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3
Q

Pooling EQ - Definition

A

Informed Player sends the same signal irrespective of Nature’s move.

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4
Q

Separating EQ - Definition

A

Informed Player sends different signals depending on Nature’s move.

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5
Q

Hybrid EQ - Defintion

A

Informed Player sends partly same and partly different signals (e.g. High: Left and Low: Mixes Left and Right)

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6
Q

Adverse Selection

A
  • Asymmetric information

- One player has information which the other player does not have

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