class 25 Moral Hazard post

class 25 Moral Hazard post - Class 25 Asymmetric...

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Class 25 Asymmetric Information: Trading Shares, Paying CEOs g, y g
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Problem Set ote the Reading ± Note the Reading ± Do the problem set before the next lecture: You train today’s material and prepare for next time
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Last Time xample: Screening with Asymmetric Information ± Example: Screening with Asymmetric Information ± Adverse Selection: ± Used Cars ± Insurance ± Quality Provision ± Reputation as a Solution
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Today rading Shares of a Company ± Trading Shares of a Company ± Final Exam Information: ± Sheet will be posted ± Monday more information ± Moral Hazard: ± How to pay a CEO ± Who should hold Mortgages?
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Trading Shares rice Offers: dverse Selection in Stock Trading Price Offers: U(p=90) = L 80 +(1-L) 100 – 90 U(p=70) = L( 80 – 70) Adverse Selection in Stock Trading Buying shares comes at a risk: The seller might know more about its value. if d td ih t l l t k li f If L=1/2: U(p=90) = 0 U(p=70) = 5 An informed trader might sell you stocks only if he thinks its worth less than the price you pay. Model Value of the stock can be either high or low. Seller knows the value. Since he needs money, he is willing to sell below value: Value v c High 100 90 Low 80 70 Buyer chooses a price offer. The seller accepts if the price is above his opportunity cost of selling, i.e., p c j. Probability that the value is low is L .
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Trading Shares rice Offers: dverse Selection in Stock Trading Price Offers: U(p=90) = L 80 +(1-L) 100 – 90 U(p=70) = L( 80 – 70) Adverse Selection in Stock Trading Buying shares comes at a risk: The seller might know more about its value. if d td ih t l l t k li f If L=1/2: U(p=90) = 0 U(p=70) = 5 An informed trader might sell you stocks only if he thinks its worth less than the price you pay. Model Value of the stock can be either high or low. Seller knows the value. Since he needs money, he is willing to sell below value: Value v c High 100 90 Low 80 70 Buyer chooses a price offer. The seller accepts if the price is above his opportunity cost of selling, i.e., p c j. Probability that the value is low is L .
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Trading Shares dverse Selection in Stock Trading xample: Bid sk Spread for Stocks Adverse Selection in Stock Trading Buying shares comes at a risk: The seller might know more about its value. if d td ih t l l t k li f Example: Bid-Ask Spread for Stocks Selling price is lower than buying price: If you sell shares to a market maker, he inks you might have bad information and An informed trader might sell you stocks only if he thinks its worth less than the price you pay. Model thinks you might have bad information and offers you low price . If you want to buy from a market maker, he thinks you might have good information and Value of the stock can be either high or low.
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class 25 Moral Hazard post - Class 25 Asymmetric...

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