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Unformatted text preview: PADP 6950: Founda1ons of Policy Analysis Asymmetric Informa0on Angela Fer1g, PhD Asymmetric Informa1on It just means one knows more than another Examples: Seller know more about quality of good than buyer Worker knows more about their effort/skill level than employer Borrower knows more about their risk of default than lender Pa1ent knows more about their health than insurer Doctor knows more about your health and treatment op1ons than pa1ent Usually assume full informa1on If informa1on is costly, then big problems in efficient func1oning of the market 1 Two big problems (especially in insurance) due to asymmetric info Adverse selec1on: the tendency for low-quality items to crowd-out high-quality items because quality is difficult to assess E.g. Those who need health insurance the most (unhealthy) are more likely to seek and have health insurance than the healthy Moral hazard: the tendency to ch...
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