Econ310_Notes20101123 - Asymmetric Information (11/23/2010)...

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Asymmetric Information (11/23/2010) Econ 310-004 Definitions transaction costs – time & money spent trying to exchange financial assets, goods, or services financial intermediaries – institutions that borrow funds from savers and make loans to others asymmetric information – unequal knowledge each party to a transaction has about the other party adverse selection – ex-ante ( before transaction) asymmetric information; the most undesirable people (from the other party’s point of view) are the ones most likely to want to engage in financial transaction moral hazard – ex-post ( after transaction) asymmetric information; the risk that one party to a transaction will engage undesirable behavior (from the other party’s point of view) principal- agent problem – managers act in their interest, not in owners’ interest (incentives problem) conflict of interest – type of moral hazard problem caused by economies of scope;
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This note was uploaded on 01/26/2011 for the course ECON 310 taught by Professor Staff during the Fall '08 term at George Mason.

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Econ310_Notes20101123 - Asymmetric Information (11/23/2010)...

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