Information? Flashcards
2 types of coordination mechanism?
Firms and markets
- info requirements of actors in any situation det mix of coordination mechanisms
- info issues cause hazards in market transactions
- info issues det types of economic organisation we see – firms, markets, something in between
Info issues are central
Price a sufficient statistic?
- p mechanism sufficient coordination where those involved have limited info req in v perfect comp where p is a sufficient statistic – so v rare
When information is imperfect?
How are the workings of markets affected?
What sort of problems occur?
What are the solutions?
Are forms of economic organisation a solution to selected information problems
Symmetrical info?
Both parties have same level of info
Asymmetric info?
one party with private info
Incomplete info?
affects both parties = normal business hazard, insurance, but even here difficulty of full contingent claims
Contingent claims contract?
covers all contingencies arising from ucnertainty
Incomplete contracting?
Cannot plan for all contingencies
Costly to fully negotiate contracts, some less risky contingencies ignored
Language limitations may not allow totally unambiguous descriptions of terms and situations which could arise
Problem 1 - Hidden info?
- adverse selection
- ex ante concept
- private info existing before transaction
- 1 trader cannot easily assess quality of another – seller knows how to detect quality diff but not buyer (reason for why more likely w experience goods)
- an info asymmetry problem
- more likely a problem w experience goods than search goods
Experience good?
don’t know quality until you use it e.g., second hand car with private purchase
Search good?
quality is known e.g., stationary
Hidden info - the issue?
- some strong incentive to sell poor quality goods when quality diff to identify
- when buyers less informed, adverse selection may result
- buyers wary of being done, so display lower willingness to pay than if they had full info
- while buyers offer lower p, sellers of better quality remove them from market, only left w those of poor quality – restricting trade
Akerlof 1970 Lemons?
Because buyers cannot tell difference, bad and good cars have to be sold at same price, lemons stay on the market
hidden info
Adverse selection and the notorious firm?
Game: A firm may decide to produce a High Quality or Low Quality product, and the buyer may decide to offer a High Price or a Low Price.
Since the firm fears that if it offers a High Quality product but that buyers only offer a Low Price, the yonly produce Low Quality products and receive LowPrices.
This is the problem of adverse selection
Results -
Each tries to predict the other.
* Seller prefers profit to break even at high prices = low quality
* Seller prefers break even to losses at low prices
* Buyer predicts low quality product forthcoming irrespective of price offered
* Low price offers predominate.
* Good seller will exit. Bad drives out good.
* Knowing buyers will discount heavily good quality products sellers only offer low quality stuff
Adverse selection - notorious firm game analysis - applications?
- insurance on autos – net result could be people don’t take insurance
- health insurance – (Obamacare) health cover more attractive for sicker people
- person always has better knowledge of their risk level than the insurance company – if group of people aren’t honest, insurance company has to put up average price – as price goes up, people low at risk will tend to withdraw leaving high risk people
Net result - bad drives out good, market fails because of asymmetric info, trade volumes fall from neo-classical ideal
