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Unformatted text preview: lawnmowers, do you think that the efficient outcome can be attained in equilibrium? Explain your answer. (d) What opportunities could you introduce into this simple environment that would allow lawnmower owners to establish the quality of their lawnmowers? (e) In the insurance market model, we know that a separating equilibrium often exists. A separating equilibrium involves giving the agents a choice between alternative contracts, knowing that different types of agents will choose different contracts. In other words, by choosing the “right” contract, an agent can credibly establish his or her private information to the insurance seller. Explain how the insurance market model provides the low-risk buyers the chance to establish themselves credibly, but the lemon’s market did not. What is fundamentally different between the types of decisions that the privately informed agents are making in the two scenarios?...
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This note was uploaded on 04/13/2010 for the course ECON 330 taught by Professor Minetti during the Fall '08 term at Michigan State University.
- Fall '08