Theme 1.3.4 Information gaps (unit 19)

Question 1

What is asymmetric information?

Answer 1

It is where buyers and sellers have different amounts of information, with one group having more information than the other.

Question 2

What is imperfect information?

Answer 2

Where buyers and sellers or both lack information to make an informed decision on the transaction.

Question 3

What is information failure?

Answer 3

Where buyers or sellers or both don’t have enough information to make a decision at all.

Question 4

What is a moral hazard?

Answer 4

when an economic agent makes a decision in there own best interest knowing that there are potential adverse risks, and that if problems result, the cost will be partly borne by other economic agents.

Question 5

What is the principal-agent problem?

Answer 5

It occurs when the goals of principals, those standing to gain or lose from a decision, are different from the agents, those making decision on behalf of the principal.

ie shareholders (principals) and mangers (agents).