SC ECON 221 - Asymmetric Information (4 pages)

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Asymmetric Information

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Asymmetric Information


This lecture discusses the concept of asymmetric information and specifics regarding this concept such as: uncertainty, risk aversion, moral hazard and adverse selection.

Lecture number:
Lecture Note
University Of South Carolina-Columbia
Econ 221 - Prin of Microeconomics

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ECON 221 Lecture 20 Outline of Last Lecture I Oligopoly characteristics II Game theory a Strategic Interaction b Dominant Strategy III Maximizing Profits IV Tacit Collusion Outline of Current Lecture I Uncertainty II Asymmetric Information a Adverse Selection b Moral Hazard III Expected Value IV Risk Aversion Current Lecture Asymmetric Information Lecture 21 How do we model decision making under uncertainty Example Why does a used car even if barely used cost so much less o Buying a car especially used is hard Is the car going to break down soon Are there issues with the car Hard to tell o Uncertainty lowers the price What does that mean These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute People with NICE used cars that should receive a higher than average price won t sell Can t get the money the car deserves So all or most of the used cars being sold are probably have trouble that the OWNER knows about but the buyer doesn t Increases uncertainty even more lowers price even more Uncertainty Asymmetric information one party seller has better information than the other buyer o Has an impact on economic behavior and outcomes o Lots of situations like this Is the local nursing home taking good care of my grandparents Is this private school really going to do a better job of educating my kids Is the person I m hiring going to be a good worker Two big problems that can arise under asymmetric info o Adverse selection o Moral hazard Adverse Selection As in the car example asymmetric information can lead to adverse selection o Because the seller has more info than the buyer the seller has an incentive to sell the worst things o Similarly when deciding whether to buy insurance or not you don t know whether you re going to get sick but you know more about your lifestyle than the insurance company As a result people who expect to be healthy don t buy insurance Those that expect

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