Econ 4001.01 1st Edition Lecture 23Outline of Last Lecture II. Game Theory BasicsIII. Cooperation in GamesIV. Strategies and OutcomesV. Sequential GamesVI. Introduction to Auctionsa. Types of AuctionsVII. Establishment of Values in AuctionsVIII. Market FailureIX. Information AsymmetryX. Hidden Action problemsa. Adverse Selectionb. Moral HazardsOutline of Current Lecture XI. How Can Firms Avoid Adverse Selection Problems?XII. SignalingXIII. The Traditional Mortgage Market ExampleCurrent Lecture- How can firms avoid adverse selection problems?o More information is the best action- Signaling- A way to avoid adverse selectiono Engage in an activity that lets buyers know you have high quality productso An effective signal must be expensive for a low quality firm to duplicate Examples: 10 year warranty for Hyundai High-level of education for a job applicant Arriving early and working late (show you’re a high quality employee)- Traditional Mortgage Marketo Buyers must have: Down payment of at least 20% of the purchase price Down payment couldn’t be a loan or gif Enough income- price not >3.5 times annual income Good credit scoreo Banks held the loan and processed the payments (this is called servicing the mortgage)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.o This had many problemso So they introduced the securitization of
View Full Document
Unlocking...