M B A 8620 Chapter Notes - Chapter 15: Adverse Selection, Reservation Price, Marginal Utility

• School: Clemson University
• Department: Business Administration
• Course: M B A 8620
• Professor: Ron Gregory

Document Summary

Asymmetric information: one party to a transaction has relevant information that another party does not have: hidden characteristics (adverse selection) Is an attribute of a person or thing that is known to one party but unknown to others. The owner of a property may possess extensive information about the mineral composition of the land that is unknown to a mining company that is considering buying the land: hidden actions (moral hazard) When one party to a transaction cannot observe important actions taken by another party. Senior managers may take action that shareholders do not observe, such as commandeering that company jet for personal use or making hidden financial decisions that create excessive risk for shareholders. A more informed party may exploit the less informed party engaging in opportunistic behavior: taking economic advantage of someone when circumstance permit, two problems of opportunistic behavior arise from asymmetric information.