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"CSR386 8.31.09

"CSR386 8.31.09 - 1 Asymmetric Information 2...

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CSR386 8.31.09 The Akerlof Paper - Relates quality and uncertainty - Buyers have incentive to sell inferior goods when quality of goods is difficult to identify - When buyer is less informed, adverse selection may occur Adverse Selection Buyers, worried about lemons (quality), are less willing to pay for the goods than if they have full information Real World Insurance Only poorer houses will buy insurance because they have poorer health In the real world this example isn’t really true In reality: cars and insurance are purchased everyday regardless of quality What are the fundamentals to recover market, what does one do about adverse selection?
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Unformatted text preview: 1. Asymmetric Information 2. Expensive to get Asymmetric information 3. If buyers could easily get information 4. If sellers could easily release information 5. Different quality, categorizing products by quality 6. No government interference Real World-Counteracting Institutions 1. Warranties for durable goods 2. Brand names and chain stores 3. Licensing practices 4. All aim to reduce asymmetric information Remember: Asymmetric information, adverse selection Risk Uncertain information The cost of not having complete information when buying a product...
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