2010 slides_asymmetric_information

# 2010 slides_asymmetric_information - 1 Asymmetric...

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1 Asymmetric information Why do professors require medical notes from stu- dents for missing a midterm test? A modest proposal for grading: Let each student choose between an individual grade or get an average grade of all students who choose to be part of the average after they take the test. Why do commerce students get paid more when they graduate than economics graduates? Often two agents want to engage in an economic transaction where one agent knows more about the value of the transaction than the other agent. E.g. seller knows more about the quality of the good that she is selling.

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Buyer knows how much he is willing to pay for the good. Worker knows how much e/ort he is exerting. 2 Moral hazard Principal has a machine that she wants to hire an agent to operate. It is costly for the agent to exert e/ort to do the task. Principal cannot observe e/ort but sees whether qual- ity of the task completed.
Let agent choose e/ort 0 or 1 . The cost of e/ort 0 is 0. The cost of e/ort 1 is 1. If agent chooses e/ort 0, output is produced with probability 1 4 . If agent chooses e/ort 1, output is produced with probability 3 4 . Let the value of output be 2 if it is produced.

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## This note was uploaded on 04/10/2010 for the course ECO ECO200 taught by Professor Carlosserrano during the Spring '10 term at University of Toronto- Toronto.

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2010 slides_asymmetric_information - 1 Asymmetric...

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