ECON 2300 Lecture Notes - Market Failure, Moral Hazard, Adverse Selection
Document Summary
Econ 2300 summer 2011 mark melatos. Topic 10 asymmetric information and contracts july 26. One party to a transaction knows more than the other party: e. g. 1 product quality seller knows more than buyer: e. g. 2 health insurance consumer knows more than insurance company: e. g. 3 work effort employee knows more than employer. Asymmetric information leads to two problems: adverse selection" hidden characteristics (e. g. health insurance), moral hazard" hidden action (e. g. health insurance, employment contracts). 1 seller overstates product quality (to charge a higher price): e. g. 2 insurance customer overstates health (to obtain a lower premium). How do we solve this problem: screening (e. g. health checks), signalling (e. g. guarantee, university degree), standardisation (e. g. mcdonald"s), reputation. Equalize information but collecting information is costly. Mh occurs when a party whose actions are unobserved affects the probability or magnitude of a payment: e. g. house/car insurance contracts, employment contracts.
