CU-Boulder ECON 4211 - Moral Hazard, Adverse Selection and Unemployment Insurance (7 pages)

Previewing pages 1, 2 of 7 page document View the full content.
View Full Document

Moral Hazard, Adverse Selection and Unemployment Insurance



Previewing pages 1, 2 of actual document.

View the full content.
View Full Document
View Full Document

Moral Hazard, Adverse Selection and Unemployment Insurance

71 views


Pages:
7
School:
University of Colorado at Boulder
Course:
Econ 4211 - Economics of the Public Sector

Unformatted text preview:

Moral Hazard Adverse Selection and Unemployment Insurance Plan 4 Examples of adverse selection Risk of Selling a Life Annuity Lemons Market 4 Moral Hazard 4 A simple job search model 4 Unemployment Insurance The structure Effects on unemployment duration layoffs unemployment rate Risks of Selling a Life Annuity cited from Neil Bruce Public Finance and the American Economy 4 In 1965 47 year old Andre Francois Raffray agreed to pay 90 year old Jeanne Calment 2 500 francs about 500 a month until she died in exchange for her apartment in Arles France 4 Time passed 4 In December 1995 M Raffray died at 77 having paid 184 000 over 30 years worth 300 00 with 6 interest over the years At that time Mme Calment was still healthy and living in the apartment 4 She died two years later on August 4 1997 1 The Market for Lemons George Akerlof 1970 4 Used cars are substantially cheaper than new cars Why 4 A car can be either a plum 11 000 or a lemon 1 000 The owner of a car knows its quality which is unobservable to potential buyers Assume that at first half of the cars in the market are plums and the other half are the lemons What is the price that a potential buyer is ready to pay 4 Will the owners of the plums want to sell for this price What will it imply about the quality and the resulting price of the used cars for sale What do the two previous examples have in common 4 two parties interact 4 one of the parties is better informed than the other 4 this information has a direct implication on the payoffs that the parties receive from a potential contract between them Adverse Selection 4 The uninformed side should expect an average payoff 4 Given this only the adverse types will want to sign a contract 2 An Implication for Unemployment Insurance 4 Assume a private firm is offering unemployment insurance and buying the insurance is not compulsory 4 What result would you expect Moral Hazard examples 4 If you insure your car against a theft there is no reason to lock the car 4 If



View Full Document

Access the best Study Guides, Lecture Notes and Practice Exams

Loading Unlocking...
Login

Join to view Moral Hazard, Adverse Selection and Unemployment Insurance and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Moral Hazard, Adverse Selection and Unemployment Insurance and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?