(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
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
3
Q
Pooling EQ - Definition
A
Informed Player sends the same signal irrespective of Nature’s move.
4
Q
Separating EQ - Definition
A
Informed Player sends different signals depending on Nature’s move.
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)
6
Q
Adverse Selection
A
- Asymmetric information
- One player has information which the other player does not have