ECN 100B Lecture Notes - Lecture 9: Adverse Selection, Reservation Price, Market Failure
21 Mar 2018
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Ecn 100b lecture 17 asymmetric information. Buyers and sellers or market competitors have had equal knowledge or information. For example: the people who buy insurance, and the company who sells it are equally uncertain about future events. This in turn will sometimes lead to market failure and destroy some desirable properties of competitive markets. Two problems of opportunistic behaviors of asymmetric information. For example: a smoker who hides his smoking habit to get non-smoking category insurance driving up premium. For example: a homeowner who has bought home insurance might become less attentive about his home security. When sellers have more information than buyers, adverse selection might drive high quality products out of the market. For example: sellers of second hand cars might know which cars are lemons" (have issues which will only become apparent to a buyer after driving the car for a while). Demand side: the number of potential buyers for used cars is huge.
