FINAL CHEAT SHEET.docx - Ch 22 Managing Incentives – Ch 24 Asymmetric Info Moral Hazard and Adverse Selection-Asymmetric Information Buyer knows more

FINAL CHEAT SHEET.docx - Ch 22 Managing Incentives – Ch...

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Speculation Now Next Month P 1 P P 2 P Q Q D D S S S’ S’ P 3 P 4 Speculation can narrow price fluctuations. Lost Value Now Gained Value Next Month Ch 22 Managing Incentives – Ch 24 Asymmetric Info, Moral Hazard, and Adverse Selection -Asymmetric Information: Buyer knows more than seller/seller knows more than buyer. Signaling - a market-based solution to the asymmetric info problem -Principle Agent Problems: A common problem is when a principle hires an agent to conduct some activity for the benefit of the principle. But the principle often has little info about how hard the agent is working on principles behalf (lawyers and client example) You get what you pay for, incentives matter! There must be a link between the performance measure and the true goal. The stronger the link, the better the result -Privatization– private prisons have incentives to lower costs but may do so at expense of quality -Pit falls of performance-based pay: cheating by agents, a weak link btwn measure and true goal -Risk averse: workers will give up some pay for a certain salary, grade by TOURNAMENT - Adds ability risk – someone’s ability is not under a player’s control. Work best when risk is > than ability risk. discourage cooperation & implicit) -Extrinsic- external reward. Intrinsic – you like doing it, take pride in work, strong work ethic -Moral Hazard – a sit in which an economic actor changes their behavior bc a portion of cost associated with behavior has been shifted (insurance/banking) -Adverse selection – a sit where there is a state of nature known only to one & the informed party seeks to take advantage of uninformed Warranties signal Ch 23 Stock Markets and Personal Finance -Higher = more risk, return (%) from a stock = increase in stock price (%) + dividend rate (%) -bonds can be short term (<1 yr, bills, US gov t-bills) and long term (1-infinity, UK consols never mat) -Diversification – holding more stocks (or bonds), reduces risk for person -Mutual funds allow investors a less expensive way to diversity, passive funds seek to mimic market average -Efficient Markets Hypothesis: Stock prices reflect all public info. “You cant beat the market”. Counterexample is “Bubbles” in asset prices, you don’t know when you’re in a bubble until you’re out Ch 21 Economics, Ethics, and Public Policy -exploitation – “trade in good X (kidneys, sex) is wrong bc it is always the poor who is selling -Meddlesome Preferences – about other peoples actions even if they don’t affect you -Cultural Goods & Paternalism – belief that certain cultural goods are important for society and, must be supported by gov (French example, will.je.suis) -Rawl’s Maximin Principle – the gov should maximize the benefits going to most disadvantaged group, maximize the minimum = “maximin”. -Veil of Ignorance: LOOK AT POOR COLULM, essentially assumes an extreme form of risk aversion (all prob placed on the worst outcome) -Utilitarianism: the government should implement policy to maximize a society’s total utility (happiness). Income should be distribute to whole values add $ more
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