Information Failure Flashcards
1
Q
What is information asymmetry
A
When buyers and sellers don’t have the same access to information
2
Q
What are examples of information asymmetry
A
Selling financial products (seller has more information)
Getting insurance (buyer has more info)
3
Q
What is the principal agent problem
A
When one person is the consumer in a transaction, but another makes the consumption decision on their behalf
4
Q
Issues with principal agent
A
Pricipal agent problems arise between managers of firms and shareholders.
There’s a misalignment of incentives, as management takes risks to raise their bonuses, which might contradict the long term health of the firm
