COMM 220 Lecture Notes - Lecture 10: Adverse Selection, Moral Hazard, Transaction Cost
5 Dec 2018
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When the price is already decided, is when we are looking at the entire market, but a single rm does not have that power. Wage is given and the supply curve is perfectly elastic. Firms don"t have power to decide the wage, but each individual rm will have a demand curve of it"s own: transaction cost, asymmetric information. When there is asymmetric information, we can observe two types of behaviours. Moral hazard happens after the transaction already takes place. The de nition is that asymmetric information occurs before transaction occurs. The ones who mostly actively seek out loans. Because the value of their car is above the price i"m offering. In this case, they don"t want to sell their second hand car. It will be the lemon owners, because i am offering a lower price. Net worth can perform a similar role to colateral. When the managers own only a small fraction of the.
