Information ECONOMICS Flashcards
What is asymmetry information?
Differences/discrepancies in knowledge between sellers and buyers
What are hidden characteristics?
One party observes a characteristics of the good or service in transaction that another party doesn’t
What are hidden actions?
One side takes actions that the other party doesn’t observe; it would be relevant for the other party to observe
What is something that is a moral hazard and affects everyone’s payoffs?
Hidden actions
Adverse selection?
Hidden characteristics, one agent decides whether to participate in the transaction in the basis of this information
What do agents actions influence?
Payoff of the principal
4 solutions to information asymmetries?
1) warranties
2) deductibles
3) certification
4) Efficiency wages
Adverse selection according to smith…
Determines quality available on the market
- health care insurance example
Lemon cars analogy…
If the market initially has an equal number of high and low quality cars:
If the buys is only willing to pay the average for the two (eg $7500):
The market will get saturated with LOW quality cars
High ability: edu or no edu?
Edu
Low ability: edu or no edu
Depends on college “value” but usually no edu is optimal
What are government solutions to asymmetric information?
1) consumer groups
2) subsidize/provisions
3) mandatory/captive insurance
What is the main hidden characteristics solution?
SIGNALING
- Michael spense signaling model
- education - ability
- your degree is a signal that you are…
What are some signals?
- warranties
- records
- degree (easier for some to get than others)
Hidden actions agents?
- insured people
- workers
