L3 Notes_Part_14

# L3 Notes_Part_14 - Information Asymmetry: Moral Hazard...

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Information Asymmetry Not real money; act as though it is. You are a Seller Choose a quality level Quality Cost A \$300 B \$200 C \$100 Profit = negotiated sale price with buyer - quality cost © W.R. Knechel You are a Buyer Buy quality A and you can sell it to auctioneer for \$500 Buy quality B, sell for \$300 Buy quality C, sell for \$125 Profit = Auctioneer’s price – negotiated sale price with seller

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Information Asymmetry Imagine you are interested in buying a car. Contrast the difference between buying a new car from a licensed Hyundai dealer and buying a used car from an individual through an online intermediary. a. Describe how information asymmetry causes problems under both scenarios.
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Unformatted text preview: Information Asymmetry: Moral Hazard Principal/Agent Problem (Why, When, Examples?) a. P & A have different utility functions Why? b. Information asymmetry – A’s effort isn’t observable c. Outcome is uncertain d. Perfect continuous monitoring is not costless Model of incentive compensation: w = a + b ( e + x + gy ) where w = wage (e+x+gy) = outcome (e.g.,company profit) e = agent controlled; (x+y) = state of nature -> not agent controlled e = (unobserved by principal) effort; x = unobserved exogenous effects on outcomes y = observed exogenous effects a = the base salary b =the intensity of incentives provided to the employee....
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## This note was uploaded on 10/05/2011 for the course ACG 5637 taught by Professor Monikacaushoulli during the Fall '08 term at University of Florida.

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L3 Notes_Part_14 - Information Asymmetry: Moral Hazard...

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