02 Economics_of_ATG_ Info - 02 Accountancy301 Spring2011...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Objectives and Economics of  Accounting Information Accountancy 301 Spring 2011 Flora Zhou 02
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Today’s agenda Group formation Group activity- Akerlof’s Market Uses of accounting information Economics of accounting information Managers’ influence on accounting  information Objectives of accounting information
Background image of page 2
Group exercise  -- Akerlof’s Market for “Lemon” There are 10 used cars. The true values of these  cars range from 1K (lemon), 2K, …, to 10K  (peach).  Cars look identical from outside and buyers do not  have technical expertise to tell which car is which. The seller knows his used cars’ true values. But buyers only know that each car has an equal  chance (10%) of being a lemon, peach, etc.  All sales are  final  without recourse – the seller will  go to Mars and live happily ever after while buyers  are stuck on earth.  Sellers’ goal is to sell the car above its true value. Buyers’ reservation price is 500 dollars above the  true value.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Discussion questions What cause Akerlof’s market to break  down? What happens if both parties know the cars’  true value? What are the remedies for Akerlof’s  market? How does it relate to accounting?
Background image of page 4
What cause Akerlof’s market to  break down? v Conflict of interest between sellers and buyers   Sellers want to sell the cars at as high a price as possible Buyers want to pay as little as possible  v Adverse selection  due to  information asymmetry  Sellers know exactly how much the used cars worth Buyers know only the distribution of true values No mechanism to break info asymmetry between sellers and  buyers in the Akerlof’s market. v Note, conflict of interest in itself is not the cause of the problem.  The root cause  is  information asymmetry  which enables one  party to take advantage of the other. Knowing this, the  uninformed party assumes the worst and price protects itself.  Thus, the market breaks down.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
What if both parties know the true  value? Theoretically, transactions can be profitable 
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 23

02 Economics_of_ATG_ Info - 02 Accountancy301 Spring2011...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online