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# lec13_with_answers_up_to_where_we_got - Econ 138 Financial...

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Econ 138 Financial and Behavioral Economics Lecture 13: Asymmetric Information Ulrike Malmendier UC Berkeley Th, March 6, 2008

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A class experiment “The Takeover Game” (Samuelson and Bazerman, 1985) “Solution:” It is rational to bid \$0 since the expected value of a bid is negative: E [ profit ( b )] = E [ profit | b V ] · Pr( b V ) + E [ profit | b < V ] · Pr( b < V ) = ( E [1 . 5 V | b V ] b ) Pr( b V ) + 0 = (1 . 5( bid/ 2) b ) = . 025 b Pr( b V ) which is maximized at b = 0 . Turned out that “expected values” and realizations are not always the same ;-)
1 Corporate Financing and Asymmetric Informa- tion First type of ‘ incomplete information problem ’ = Moral Hazard. Informational problem: hidden actions, e.g., manager can shirk when she is supposed to work hard. Second type of ‘incomplete information problem’ = asymmetric informa- tion Informational problem: one party knows more than the other party.

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Example 1: wisdom teeth extraction (Doctors are very prone to rec- ommend extraction. Is it necessary? Or do they just want to make money. Likely too many wisdom teeth extracted.) Example 2: fi nding a good mechanic. (Most people don’t have any idea if they are being told the truth. People can shop around, but this has considerable cost. Because of this, mechanics can sometimes in fl ate prices.) Attempted solutions safeguards: such as reputation, certi fi cation bod- ies.
Lemons Problem

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