Asymmetric Information

Question 1

definition

Answer 1

in which one party of a transaction process know a material fact that the other party does not

Question 2

adverse selection

Answer 2

where the sellers have information that the buyers don’t, for example an aspect of the product quality - e.g. insurance, the adverse selection is the tendency of those in dangerous jobs of high-risk lifestyles to get life insurance.

Question 3

moral hazard

Answer 3

under certain circumstances, individuals will alter their behaviour and take more risks
“any situation in which one person makes the decision about how much risk to take while someone else bares the cost if it goes badly.

Question 4

screening

Answer 4

uninformed agent (victim of asymmetric information), act to determine the information possessed by the informed people

Question 5

signalling

Answer 5

transferring information from informed person to the uniformed person (victim of asymmetric information)

Question 6

market for lemons

Answer 6

how markets fail to behave optimally in the presence of asymmetric information

Question 7

market fror lemons (2)

Answer 7

when buyers cannot judge the product quality before purchasing it, low-quality products, lemons may drive high quality products out the market.

Question 8

lemons

Answer 8

cars with problems that become apparent to the owner only only after the care has been driven for a while, seller knows if the car is a lemon or a good car

Question 9

reservation price

Answer 9

the lowest price they will sell for

Question 10

symmetric information

Answer 10

if both sellers and buyers have equal information on the quality of all the used cars before any sales take place, all the cars are sold and good cars sell for more than lemons.

Question 11

risk neutral

Answer 11

buyer and sellers are equally ignorant. indifferent with respect to financial risk

Question 12

expected value

Answer 12

is the anticipated value for a given investment 
PROBABILITY x(lemon) + PROBABILITY x(good car)

Question 13

inefficient

Answer 13

inefficient when sellers have greater knowledge than buyers. high quality cars remain in the hands of people who value them less than potential buyers do

Question 14

limiting lemons

Answer 14

consumer screening, 3rd party companies, signalling by firms

Question 15

cheap talk

Answer 15

communication between players which does not directly affect the payoff of the game - unsubstantial claims of statements

Question 16

education/assumption

Answer 16

signalling: if high ability are made to go to college/uni than low ability people, schooling signal ability to employers.

the assumption is that people go to school serves as a signal; that schooling provides no training that is useful to firms

Question 17

asymmetric information in insurance

Answer 17

when insuring a good the insurer is uncertain how well the customer will look after a piece of property - to lower the risk insurers will give discounts for “no claims bonuses” this is way of gaining information about how careful/unlucky a consumer is.

Question 18

asymmetric information in finanace

Answer 18

the borrower has much better information about the financial state than the lender - the lender has difficulty knowing whether it is likely the borrower will default - if there as perfect information they wouldn’t have this worry

Question 19

shirking

Answer 19

a moral hazard in which agents do not provide all the services they are paid to provide (unwilling to do something) - e.g. when working not fulling the job requirements/slacking and being lazy

Question 20

screening in hiring

Answer 20

interviews, tests, statistical descrimination

Question 21

shirking

Answer 21

ϴ(w-w*) - probability that a shirking worker is caught and fired

Question 22

risk neutral in working

Answer 22

ϴ(w-w*) >G - ( the gain from taking it easy on the job)