Asymmetric Information Flashcards
definition
in which one party of a transaction process know a material fact that the other party does not
adverse selection
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.
moral hazard
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.
screening
uninformed agent (victim of asymmetric information), act to determine the information possessed by the informed people
signalling
transferring information from informed person to the uniformed person (victim of asymmetric information)
market for lemons
how markets fail to behave optimally in the presence of asymmetric information
market fror lemons (2)
when buyers cannot judge the product quality before purchasing it, low-quality products, lemons may drive high quality products out the market.
lemons
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
reservation price
the lowest price they will sell for
symmetric information
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.
risk neutral
buyer and sellers are equally ignorant. indifferent with respect to financial risk
expected value
is the anticipated value for a given investment PROBABILITY x(lemon) + PROBABILITY x(good car)
inefficient
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
limiting lemons
consumer screening, 3rd party companies, signalling by firms
cheap talk
communication between players which does not directly affect the payoff of the game - unsubstantial claims of statements
education/assumption
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
asymmetric information in insurance
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.
asymmetric information in finanace
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
shirking
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
screening in hiring
interviews, tests, statistical descrimination
shirking
ϴ(w-w*) - probability that a shirking worker is caught and fired
risk neutral in working
ϴ(w-w*) >G - ( the gain from taking it easy on the job)
