Lecture+22+November+29

Lecture+22+November+29 - Todays Agenda Asymmetric...

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Today’s Agenda Asymmetric Information Hidden information: the “lemons” problem Hidden action: moral hazard Principal-agent problems
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Asymmetric information The Pareto efficiency of competitive outcomes requires that markets be complete . If trading is not possible for some commodity x, then trade cannot accomplish, for example, MB 1 x = MB 2 x . Markets may be incomplete because of differences in information about the quality of commodities.
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Asymmetric information about quality A seller of a product is better informed about its quality than a buyer of the product. A worker knows her abilities and skills better than a prospective employer. A borrower knows better than a lender whether a loan would be repaid. A firm’s managers know more than its shareholders about the firm’s costs and its marketing and investment opportunities.
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The market for used cars Suppose quality were observable at no cost. Q $/Q S high Q $/Q S low D low D high
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The market for used cars when quality is unobservable Q $/Q Q $/Q Q $/Q S low S high
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Q $/Q Q $/Q Q $/Q S low S high a a The market for used cars when quality is unobservable
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Q $/Q Q $/Q Q $/Q S low S high a a b e b+e The market for used cars when quality is unobservable
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Q $/Q Q $/Q Q $/Q S low S high a a bc ef b+e c+f The market for used cars when quality is unobservable
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This note was uploaded on 10/25/2011 for the course ECONOMICS 01:220:102 taught by Professor Prusa during the Fall '10 term at Rutgers.

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Lecture+22+November+29 - Todays Agenda Asymmetric...

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