EF3442_2017_B_Information.pptx - Information Incentives...

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Information & Incentives Chapter 18
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Motivation In some situations, one party may have more information than the other party (asymmetric information) Used car salesman usually know more about the quality of the car than the potential buyer. Health insurance salesman knows less than the health of the customer that would like to buy the insurance. Bank loan officers know less about the riskiness of the project that the client wants to take a loan on. Firms know less about the ability (potential) about the people who apply for a job. In this chapter, we will see how informational asymmetries like the ones in the examples above affect the outcome, i.e., adverse selection and discuss what we can do about it.
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Exercise 1: Health insurance, market solution There are two types of people who would like to purchase health insurance. Both buyers have an initial wealth of $100 and risk averse. Low-risk buyers have %20 chance that they will get a major illness and lose all their wealth in health expenses.
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