Information asymmetry What is this thing Information about the quality of goods in the market is not the same between the buyer and seller What readings discussed it Varian What causes it They cant view the moral hazard What are its effects Can cause externalities that cause market failures Can cause a credible commitment issue Equilibrium quality shows the supply and demand of different qualities Think of examples There is a info asymmetry in t he labor market because it is difficult for a firm to find out how productive the employees are Selling lemons if the customer is unsure if he may get a lemon he will only want to pay a small amount and this makes the sellers of plums not want to sell their cars therefore there is less plums on the market and the buyer knows he has even a greater chance of buying a lemon therefore the price goes down even further Example about not knowing whether it is a high or low quality umbrella An owner of land not trusting the productivity of the workers He has multiple incentive options rent wage labor take it or leave it sharecropping But all of these have monitoring costs Moral hazard What is this thing The lack of incentive to take care It s a hidden action problem What readings discussed it Varian What causes it What are its effects Causes the problem that insurance cant provide too little or the people will bear too much risk but if provide too much the people will take inadequate care To help fix this insurances have deductible Think of examples The owners may not take care and make precautionary steps if they have insurance Bicycle owners may buy nice locks if they don t have insurance but would buy flimsy locks if they don t have insurance Adverse selection What is this thing When parties make decisions because of hidden info Hidden information problem What readings discussed it Varian What causes it What are its effects How to avoid this make everyone participate Like make all employees have insurance as part of their benefits Think of examples Insurance market if insurance based their rates on the average amount of thefts they will go broke fast Those in nice neighborhoods wont buy it and those in bad neighborhoods will buy it This makes the insurance company base their rates off the worst case scenarios but then those with low risk will be unwilling to purchase the high priced insurance The Hope Scholarship made by Bill Clinton students could borrow money for college and repay their loans with a percentage of their annual income With the high and low earners the program should break even but the high paying income future job students know it s a bad deal to take the loan The only students who take the loan are those ho will have low paying job therefore the program went bankrupt This is adverse selection because the students know the hidden knowledge about their future career plans Signaling What is this thing Done by those who hold the info ex ante before the transaction to solve the assymetric info problem What readings discussed it Noorudin Varian What causes it When there is assymetric info and the seller needs to prove the reliability of themselves or their product What are its effects Branding is a form of signaling Companies pay for the trust of their brand builds a reputation Like how companies say Since 1947 they obviously wouldn t be ripping of customers successfully for that many years Think of examples Govern can signal to investors that they will not change pro growth policy A car owner to offer warranty which shows that the car is reliable High school graduation is a signaling sheepskin affect Screening What is this thing Done by those who lack info ex ante before the transaction to solve an assymetric info problem What readings discussed it Varian What causes it Done by those who are about to buy a product they don t have much info about to find out about quality or reliability What are its effects One type of signaling is separating equilibrium when each worker makes a choice that allows him to separate himself from the other workers Think of examples Employs screen their future employs by seeing their education references criminal backgrounds They may screen with statistical rational discrimination like when the may hire a may because they are less likely to take maternity leave Political institutions economic performance What is this thing Przorski and Limongi The results are inconclusive about if democracies positively affect growth There are 3 types of regimes Democracies the citizens decide the size of the govern and have a right to the fiscal residuum Autocracy the state decides the size of the govern and the fiscal residuum Bureaucracy the state decides the size of the govern but the citizens have a right to fiscal residuum Acemoglu Why are some countries poor The geography hypothesis the geography climate and ecology of a society affects the technology and incentives of the inhabitants Nature can cause the poverty The global south is primarily more poor More disease There is a correlation but not causation The Institution Hypothesis based on human influences Some societies have good institutions that encourage investment in machinery human capital and better technologies and consequently these countries achieve economic prosperity Good institutions have 3 things Enforcement of property rights Constraints on elites Equal opportunity What readings discussed it Przeworksi and Limongi Acemoglu Root Causes What causes it They look at former colonies to prove this point Even though the geography did not change their prosperity did It must be because of institutions Proved further through reversal of fortunes explained further below Societies do not naturally gravitate towards good institutions What are its effects The type of institutions does not only affect the economic prospects of nations but also income distribution The institutions affect the size of the social pie and how it is distributed Think of examples Also when Noorduin discuss institutions helping credible commitment and make for a better economic growth Colonial legacies natural experiments What is this thing Acemoglu wants to use a natural experiment to test whether institutions affects whether a country is poor or not They want a country that has constant factors and a exogenous change in institutions Colonization is a good way to test this Colonizers set up 2 different types of institutions 1 Purely extractive institutions slave plantations gold