{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

lec13_with_answers_up_to_where_we_got

lec13_with_answers_up_to_where_we_got - Econ 138 Financial...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Econ 138 Financial and Behavioral Economics Lecture 13: Asymmetric Information Ulrike Malmendier UC Berkeley Th, March 6, 2008
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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 ;-)
Background image of page 2
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.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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.
Background image of page 4
Lemons Problem
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}