Information Gaps Flashcards
Perfect Information
When the party has sufficient information to make a fully informed decision. Consumers often don’t have this when purchasing something
Asymetric Information 2
When one party possesses more information than another during a transaction. Often the producer knowing more than the consumer
E.g. In the American healthcare system, a doctor could prescribe a patient the most expensive drug, despite it not being the most effective & the consumer wouldn’t know
Information Gaps diagram
Just a rightwards shift in demand. This is because consumers may overestimate the utility they will derive from the good. This good may be overproduced rather than a cheaper, more effective good. D1 shows the demand due to imperfect information, D2 is where demand would be if consumers had perfect information, ABC is the information gap
Principal-Agent Problem
The principal-agent problem is a conflict in priorities between a person or group and the representative authorized to act on their behalf.
The principle & agent don’t always have the same goals. e.g. stockholders & firm managers or those looking to take out a mortgage & the mortgage broker (could take out a larger mortgage for more commission etc.)