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Goverments: if governments know that inability to pay creditors will lead to yet more loans, then they are less likely to have sound financial policies. Investment advisors: the Merryl Lynch scandal
Moral hazard shapes debt contracts (e.g., the asset substitution problem is due to moral hazard by owners)
21 Lecture 13: Adverse Selection Outline: The adverse selection problem Signaling Various examples of signaling in financial markets Discussion Event studies
22 Adverse Selection: “The Lemons Problem” Adverse selection is a problem that arises for a buyer of goods, services, or assets when the buyer has difficulty assessing the quality of these items in advance of purchase
Develop the idea using the market of used cars as example
There are good cars that are worth Vg and bad cars that are worth Vb, with Vg > Vb > 0
Sellers know the quality of their cars but buyers do not
Buyers only know that half of the cars offered are good and half is bad
Buyers and sellers meet only once and all deals are final
Note that both type...
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This document was uploaded on 03/09/2014 for the course COMM 371 at The University of British Columbia.
- Spring '13