Asymmetric Information Flashcards
If people are rational and risk averse, they will work in a risky industry only if…
they will work in a risky industry only if they are paid more than they would earn in less risky industries
Do firms or workers typically have more information about job safety?
Firms
Asymmetric Information
situation in which one party to a transaction knows a material fact that the other party does not
Adverse Selection
Opportunism characterized by an informed person’s benefiting from trading or otherwise contracting with a less informed person who does not know about an unobserved characteristic of the informed person
Moral Hazard
Opportunism characterized by an informed person’s taking advantage of a less-informed person through an unobserved action
Screening
an action taken by an uninformed person to determine the information possessed by informed people
Signaling
an action taken by an informed person to send information to an uninformed person
What is the unwillingness to produce high-quality goods due to an externality?
A firm does not completely capture the benefits from raising the quality of tis product
The social value of raising the quality (as reflected by the increased revenues shared by all firms)….
is greater than the private value (which is only the higher revenue received by the firm with the good product.
Sellers of good quality items are…
implicitly subsidizing sellers of lemons
Standard
a metric or scale for evaluating the quality of a particular product
Certification
A report that a particular product meets or exceeds a given standard level
Signals solve…
the adverse selection problem only when consumers view them as credible (only high-quality firms find their use valuable)
When consumers have asymmetric information and when search costs and the number of firms are large, the only possible single-price equilibrium is
at the monopoly
Cheap Talk
unsubstantiated claims or statements
