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ECON 351 (21)
Chapter 9

Chapter 9_Transactions Costs, Asymmetric Information, Structure of Financial System.docx

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Pennsylvania State University
ECON 351
Frank Sorokach

Chapter 9: Transactions Costs, Asymmetric Information, and Structure of Financial System  Asymmetric Information 1. Adverse Selection –Asituation where sellers have information that buyers do not about some aspect of product quality - Insurance and Investor like low-risk and high return - It covers making bad decisions because of not having the complete information. 2. Moral Hazard – Risk that people take actions after they have entered into a transaction that will make the other party worse off - I did not warn someone about a bad condition of an item before selling it such as car  Moral Hazard in Stock Market - Organization of large publicly traded firms result in a separation of ownership from control. - Firms are owned by shareholders but run by top management CEO, CFO, COO, etc - To reduce this problem, the SEC requires managers to issue financial statements.  Moral Hazard in Bond Market -
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