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assymmetric info - Asymmetric Information Main topics...

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Asymmetric Information
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Main topics problems due to asymmetric information response to adverse selection how ignorance about quality drives out high- quality goods price discrimination due to false beliefs about quality market power from price ignorance problems arising from ignorance when hiring
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Problems due to asymmetric information if both parties to a transaction have limited info, neither has an advantage asymmetric info leads to opportunism , whereby informed person benefits at expense of those with less info
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Types of opportunistic behavior adverse selection moral hazard
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Adverse selection opportunism characterized by an informed person’s benefiting trading (contracting) with less informed person who does not know about an unobserved characteristic of the informed person people who buy life insurance know more about their own health than does the insurance company
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Adverse selection market failure reduces size of a market (possibly eliminating it) example: few older people regardless of their health buy term life insurance because rates are extremely high because of adverse selection
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Moral hazard opportunism characterized by an informed person taking advantage of a less-informed person through an unobserved action examples sleezeball sells you swamp land in Florida employee shirks if not monitored by employer
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Moral hazard not necessarily harmful pregnant women with health insurance make more prenatal doctor visits extra cost bad for insurance firms, but society benefits from healthier women and babies
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Responses to adverse selection main methods for solving adverse selection problems are to restrict opportunistic behavior equalize information
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