Chapter 13 - MF asymmetric info Flashcards
Asymmetric Information
One agent has more info than another in an economic transaction. (incomplete)
Effect of asymmetric information
- leads to 1 party exploiting the other
- misallocation of resources
- distorts market forces how they are determined
- suboptimal selection of choice.
When is the market efficient?
When there is perfect knowledge (complete)
Why is the market inefficient with Asymmetric information
- consumers/produce pay/produce too little/much
- CS / Ps is not at maximum
What is opportunistic behaviour
When one party has an advantage over another party due to lack of information
What are the types of opportunistic behaviour
1) Adverse Selection
2) Moral Hazard
What is adverse selection?
undesired decisions/outcomes occuring as a result
- economic imba of power, due to one party having more info
- causing distortion, assumptions made
- e.g second hand goods quality
What is moral hazard?
Party which is protected from risk due to superior info acts differently than if they were exposed to risk.
What are the different Government responses to asymmetric Information?
- Legislation (laws stipulated)
- provision of information about products
- helps make informal decisions
What are the different Private responses to asymmetric information?
Signalling and Screening
What is signalling?
- party with superior info, tackles adverse selection (utility max)
- signal benefits of the product, making it distinguishable
- reassuring signal sent to buyers (incentive)
What is screening?
- party, inferior info tackles adverse selection (utility max)
- ‘screen’ biased info, make better purchasing decisions
- ‘screener’ learns more about product, rectifying imbalances related to product
