22 Asymmetric Info Factor Markets Handout

22 Asymmetric Info - 1 u Situations in which some market participants know more about the value of the good than others u Asymmetric information

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Unformatted text preview: 1 u Situations in which some market participants know more about the value of the good than others. u Asymmetric information causes: u Inefficient market outcomes u Market breakdown Asymmetric Information Asymmetric Information u Adverse Selection – unobservable characteristic 3/4 used cars are “good” (“peach”) 1/4 used cars are “bad” (“lemon”) u Everyone knows: The Lemons Problem u Knowledge u Seller knows: Quality of the car he is selling 100 buyers of used cars 100 sellers of used cars u Market Participants u Buyers: Cannot distinguish between good and bad cars Asymmetric Information Asymmetric Information u Buyers and sellers maximize expected value Value lemon Value peach Seller Buyer $1000 $1200 $2000 $2400 The Lemons Problem u Can good and bad cars sell for a different price? Asymmetric Information Asymmetric Information u Buyers and sellers maximize expected value Value lemon Value peach Seller Buyer $1000 $1200 $2000 $2400 NO 2 u Can good and bad cars sell for the same price? u Buyer’s benefit is ¼·1200 + ¾·2400 = 2100 probability lemon probability peach Asymmetric Information Asymmetric Information The Lemons Problem u Buyers and sellers maximize expected value Value lemon Value peach Seller Buyer $1000 $1200 $2000 $2400 ⇒ All cars sell YES ⇒ Sellers don’t sell good cars ⇒...
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This note was uploaded on 03/12/2010 for the course ECON 101 taught by Professor Gerson during the Fall '08 term at University of Michigan.

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22 Asymmetric Info - 1 u Situations in which some market participants know more about the value of the good than others u Asymmetric information

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