Lec_15_value_of_info

# Lec_15_value_of_info - Chapter 12 Economics of Information...

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1 Chapter 12: Economics of Information A. Probabilities B. Expected value C. Risk aversion D. Value of information Example: Babe Ruth 1933 Goudey baseball card Option 1: put ad in local classifieds, sell to someone in San Diego for \$500 Option 2: auction on ebay, sell to price specified by second- highest bidder Say highest bid is \$900, second-highest is \$800 Surplus to seller: \$800 - \$500 - \$40 = \$260 Surplus to buyer: \$900 - \$800 = \$100 Total surplus generated by ebay: \$260 + \$100 + \$40 = \$400 Using ebay generated a surplus, but what did ebay produce? Answer: ebay produced the information that there was a seller in San Diego and a buyer in Toronto

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2 broker: someone who gets paid a commission for bringing a buyer and seller together • stocks and bonds • real estate Sales person: May help provide you with information about which product is best for you Examples: • computers • sports equipment • hardware Free rider problem: Once information is known, it may be possible to use or disseminate without paying for it Example: obtain detailed information for computer salesperson, then buy online In some cases, laws may protect the broker to make sure she gets paid (e.g., real estate) In other cases, the existence of the free- rider problem would lead us to expect that too little information is supplied by the private market Chapter 12: Economics of Information A. Probabilities B. Expected value C. Risk aversion D. Value of information E. Asymmetric information
3 Suppose that 90% of the cars that are manufactured work as they’re supposed to But 10% of the cars are “lemons” (constant and expensive repair bills) Suppose you can’t determine whether a car

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Lec_15_value_of_info - Chapter 12 Economics of Information...

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