Lecture 2 Flashcards
2 types of information disparity
- Missing information for all
- Information unevenly distributed (info assymetry)
Consequences of missing information for all
There is no market for outputs involving high levels of uncertainty. Only solution left could be autonomous production
2 types of Assymetric information
Hidden information (Ex-ante)
Hidden action (Ex-post)
What does hidden information lead to?
Leads to adverse selection
Hidden information meaning
One party has more information than the other BEFORE signing the exchange contract. Only a possibility that party will use that information to harm or might use it because of ignorance
Adverse selection meaning
One party has more information than the other BEFORE signing the exchange contract and uses it to make himself better off
Hidden action meaning
One party has more information than the other AFTER signing the exchange contract. Only a possibility that party will use that information to harm or might use it because of ignorance
Moral hazard meaning
One party has more information than the other AFTER signing the exchange contract and uses it to make himself better off
What happens with markets when information is unevenly distributed or lacking
Markets are inefficient
price-taker
agent has to accept the market price and cannot expect to influence the price level
On what circumstance can we say that price is a sufficient statistic?
In perfect competition, where everyone is a price-taker
Contingent claims contract meaning
derivative with a payout that is dependent on the realization of some uncertain future event
incomplete contracting meaning
situation where it is not possible or practical to specify all the terms and contingencies of a contract comprehensively
The fundamental paradox of information
the value of information can only be realized by revealing it
to another party, but such disclosure destroys its value
solution for hidden information
signalling
signalling meaning
action that can be taken by the owner of private information to indicate the real value of product or characteristics
screening meaning
strategy that the other party may use toward owners of private information
solution for hidden action
screening (increase observability), risk-sharing arrangements
Decision tree nodes
Square node - individual has to choose an act
Circle node - random process of choice
Complete information
Information that removes all uncertainty
Rival good
A good that can only be consumed by one person at a time
Non-rival good
A good that can be consumed by multiple people at the same time (e-book or INFORMATION)
Durable economic good
A good that you can use multiple time
Non-durable economic good
A good that you can use only once
