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Definition
| Situation in which a buyer and a seller possess different information about a transaction. |
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| When sellers of products have better information about product quality than buyers, a “lemons problem” may arise in which... |
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| low-quality goods drive out high quality goods (as buyers lower their expectations about the average quality of cars on the market) |
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| Form of market failure resulting when products of different qualities are sold at a single price because of asymmetric information, so that too much of the low-quality product and too little of the high-quality product are sold. |
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| implications for insurance market |
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Definition
People who buy insurance know much more about their general health than any insurance company can hope to know, even if it insists on a medical examination.
As a result, adverse selection arises, much as it does in the market for used cars. |
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Credit card companies and banks can use computerized credit histories, which they often share with one another, to distinguish low-quality from high- quality borrowers.
Many people, however, think that computerized credit histories invade their privacy. |
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| other examples of asymmetric info |
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Definition
Retail stores: Will the store repair or allow you to return a defective product?
● Dealers of rare stamps, coins, books, and paintings: Are the items real or counterfeit?
● Roofers, plumbers, and electricians: When a roofer repairs or renovates the roof of your house, do you climb up to check the quality of the work?
● Restaurants: How often do you go into the kitchen to check if the chef is using fresh ingredients and obeying health laws? |
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Definition
| Process by which sellers send signals to buyers conveying information about product quality. |
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| To be strong, a signal must be... |
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| ...easier for high-productivity people to give than for low- productivity people to give, so that high-productivity people are more likely to give it. |
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| Education can be a useful signal of the high productivity of a group of workers if education is easier to obtain for this group than for a low- productivity group. |
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| When a party whose actions are unobserved can affect the probability or magnitude of a payment associated with an event. |
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| Moral hazard alters the ability of markets to allocate resources efficiently. |
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| Problem arising when agents (e.g., a firm’s managers) pursue their own goals rather than the goals of principals (e.g., the firm’s owners). |
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| Individual employed by a principal to achieve the principal’s objective. |
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| Individual who employs one or more agents to achieve an objective. |
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| Organizational form in which several plants produce the same or related products for a firm. |
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| Organizational form in which a firm contains several divisions, with some producing parts and components that others use to produce finished products. |
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| Explanation for the presence of unemployment and wage discrimination which recognizes that labor productivity may be affected by the wage rate. |
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| Principle that workers still have an incentive to shirk if a firm pays them a market-clearing wage, because fired workers can be hired somewhere else for the same wage. |
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| Wage that a firm will pay to an employee as an incentive not to shirk. |
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