Asymmetric breeding

PR Chapter 17-614-617

Asymmetric information: Situation in which a buyer and seller posses different information just intimately a transaction.

? Why does the fact that the car is second-hand reduce its pass judgment so untold?

Because there is a asymmetric information about its quality.

The lemons problem: With asymmetric information, low-quality goods drive high-quality goods out of the foodstuff. (is an heavy source of securities industry failure)

Adverse selection: form of market failure resulting when products of different qualities are sold at a single price because of asymmetric information, so that too much of low-quality product and too little of the high-quality product are sold.

The market for insurance:

Unhealthy population want insurance-( increase the relation of unhealthy people( price of insurance increase( more healthy people give up insurance(further increase the proportion of unhealthy and the price( almost unhealthy people buy insurance( extreme insurance companies wear out selling

The market for credit

Low quality borrowers more likely to borrow(increase the spare-time activity rate(increase the number of low-quality borrowers(further increase interest rate

Mansfield: Chp. 17-671-676

Owner-manager conflict

Shareholders are concerned about the value of their shares

Objectives of managers:


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Minimizing effort

2. Maximizing job security

3. Avoid failure

4. Enhancing reputation and trading opportunities

5. Consuming perquisites

6. Pay

The principal-Agent Problem: arise when management has different objectives to that of shareholders of the order and due to information asymmetry leads to negative effects for wholeness party, usually the shareholder.


Principal-Agent model

“Cost of effort” is the remuneration the manager “expects” to provoke in return for exerting effort.


Asymmetric Information in economic Theory

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