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Chapter 22

Microeconomics chapter 22.docx

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ECON 200

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Microeconomics Chapter 22  Asymmetric information  Hidden actions  Difference in access to relevant knowledge.  Moral hazard: the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior.  Agent: a person who is performing an act for another person (principal).  Principal: a person for whom another person (agent) is performing an act. • Employers can respond by: ♦ Better monitoring (cameras) ♦ High wages (more incentive not to be fired) ♦ Delayed payment  Hidden characteristics  Adverse selection: the tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party. • The seller knows more than the buyer about the good sold ♦ Car market for used cars ♦ Labor market: when wages are lowered the employees that know they are more skilled and worth more will quit ♦ Health insurance: if you are sick you have to pay more, if your healthy you won’t pay for expensive insurance • Invisible hand doesn’t always work  Market responses to problems of asymmetric info  Signaling: action taken by an informed party to reveal private information to a uniformed party. • (Advertising, college degrees): must be costly, but less costly for the person with the higher-quality product ♦ If they love you it is easier to pick a gift they will like  Screening: action taken by an uninformed party to induce an informed party to reveal information. • Asking to get the car checked, if the seller says no they know its bad. • Insurance: driver his
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