Info And Behavioural Economics

Question 0

Agent

Answer 0

A person who is performing an act for another person, called the principal

Question 1

Principal

Answer 1

A person for whom another person, the agent, is performing some act

Question 2

Asymmetric info

Answer 2

Where 2 parties have access to diff info

Question 3

Moral hazard

Answer 3

The tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behaviour

Question 4

When do moral hazards occur

Answer 4

When the agent is performing some task on behalf of the principal

Question 5

How can employers respond to the problem of moral hazards and their workers

Answer 5

Better monitoring
High wages- workers less likely to risk losing out on high wages if get fired
Delayed payment

Question 6

Adverse selection

Answer 6

Where a principal knows more about their situation than the agent, leading to the agent preferring not to do business with the principal

Question 7

Hidden characteristics: adverse selection and the lemons problem

Answer 7

Market for used cars-sellers know car’s defects unlike buyer
Labour market- workers’ abilities vary, and may know their own abilities better than firms that hire them. When a firm cuts wages, more talented workers more likely to quit knowing they can find other employment
Insurance market- buyers of health insurance know of their own health

Question 8

Signalling to convey private info

Answer 8

An action taken by an informed party to reveal private info to an uninformed party

Question 9

Screening to induce information revelation

Answer 9

An action taken by an uninformed party to induce an informed party to reveal info

Question 10

Deviations from the SEM: people aren’t always rational

Answer 10

We are satisficers- those who make decisions based on securing a satisfactory rather than optimal outcome

Question 11

Deviations from the SEM: what things have an effect on consumer decision making

Answer 11

Mental accounting
Herd mentality
Prospect theory- theory that suggests people attach diff values to gains and losses and do so in relation to some reference point

Question 12

What is the endowment effect

Answer 12

Where the value placed on something owned is greater than on an identical item not owned

Question 13

Deviations from the SEM: people care about fairness

Answer 13

Ultimatum game: 2 players, A suggests proposal of split of £100. B accepts = both get money, B rejects= neither
SEM= humans are rational-wealth max.: A propose £99-£1, B accepts
Really- humans = fair, 50-50 /70-30