Chapter 22 Frontiers of Microeconomics.docx
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Chapter 22 Frontiers of Microeconomics
Moral Hazard: The tendency of a person who is imperfectly monitored to engage in
dishonest or otherwise undesirable action.
Agent: A person who is performing an act for another person.
Principal: A person for whom another person, called the agent, is performing some act.
Avoiding The Moral Hazard in the Workplace
Adverse Selection: The tendency for the mix of unobserved attributes to become
undesirable from the standpoint of a uniformed party.
This arises when the seller of a good knows more about the attributes than the buyer of a
Signaling: An action taken by an informed party to reveal private information to an
Advertising, signals to potential buyers that their product is high quality.
Screening: An action taken by an uninformed party to induce an informed party to reveal
Ex. Asking a used car seller to get the car checked out before buying, if they say know
you can expect the car to be a lemon.
Insurance offers two types of policies.
The Condorcet Paradox: The failure of majority rule to produce transitive preferences
Arrows Impossibility Theorem: A mathematical result showing that, under certain
assumed conditions, there is no scheme for aggregating individual preferences into a
valid set of social preferences.
Median Voter Theorem: A mathematical result showing that if voters are choosing a
point along a line each voter wants the point closest to their most preferred point, the
majority rule will pick the most preferred point of the median voter.
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