ECON 200 Chapter Notes - Chapter 10: Adverse Selection, Stamen, Opportunity Cost
9 Apr 2016
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Complete information: state of being fully informed about the choices that relevant economic actors face. Information asymmetry: a condition in which one person knows more than the anther: happens because of wants and constraints of those involved, if both parties" incentives are aligned, then it doesn"t matter. Principal-agent problem: a person (principle) entrusts someone else (agent) with a task: agent has incentive to slack off (risky behavior) Moral hazard: the tendency for people to behave in a riskier way or renege on contracts when they do not face the full consequences of their actions: could be avoided through better monitoring. Bosses had closer eyes on employees: moral hazard is about actions, occurs after the parties have voluntarily entered into an agreement. Screening: taking action to reveal private information about someone else. Signaling: taking action to reveal one"s own private information. Reputation: incentive for more informed party to not take advantage of information asymmetry.
