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EC2A3 > 8. How do governments behave? > Flashcards

8. How do governments behave? Flashcards

1
Q

What is adverse selection?

A

Asymmetric information about a characteristic

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2
Q

What is moral hazard?

A

Asymmetric information about an action

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3
Q

What is asymmetric information?

A

One economic actor knows something pertinent to the transaction that another party does not know

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4
Q

What are the issues with asymmetric information?

A
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5
Q

What is a market for lemons?

A
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6
Q

The work of George Akerolf

A
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7
Q

What are examples of adverse selection?

A

.

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8
Q

Market and government solutions
* Gurantees
* Trading standards

A

Slide 7

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9
Q

When will consumers buy the second hand car?

A
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10
Q

Probability function

A
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11
Q

Demand function

A

.

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12
Q

Simple adverse selection model: What happens to supply when there is no way to tell apart the bad and good quality?

A
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13
Q

What if there is full information in a market where there previously was asymmetric information between bad and good quality goods?

A
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14
Q

Probability function when:

A
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15
Q

Demand and supply when:

A
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16
Q

What are the implications of adverse selection?
Is this pareto efficient?
Who makes profits?
Is there regret?

A

.

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17
Q
A
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18
Q

When does the market collapse

A
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19
Q

What are product gurantees and how do they work?

A
20
Q

The role of product gurantees:
* Equation that they buy if:

A

.

21
Q

Impact of gurnatees on demand (drawing)

A
22
Q

Will suppliers of lemons want to offer a warranty?

A
23
Q

What are the oconditions needed so gurantees can be offered?

A
24
Q

What are some potnetial market solutions for those who suffer from adverse selection

A
25
Q

Solutions for adverse selection: Information providers

A
26
Q

Impact of paying for inspection on demand

A
27
Q

Government attempts with adverse selection
* Why is it an issue?
* What can they do about it?

A

.

28
Q

Michael Spence

A
29
Q

Full information

A
30
Q

Asymmetric information

A
31
Q

Education as a signal
What are the possible equilibriums?

A

.

32
Q

Seperating equilibirum

A
33
Q

Seperating equilibrium
Graph

A
34
Q

What are the key results of the seperating equilibrium?

A
35
Q

What is a pooling equilibrium (Everyone takes the education signal)?

A
36
Q

What are the conditions so the pooling equilibrium

A
37
Q

What are the key results of the pooling equilibrium?

A
38
Q

What are the welfare outcomes?

A
39
Q

What is the sheepskin effect?

A
40
Q

(Kiger, 2021)
What is iBuying in the residential real estate market?

A
  • Homeowner sells to an intermediating company that uses algorithms to determe the market value of home
  • Quickly sell home, iBuyer renovates and flips it
41
Q

(Kiger, 2021)
From the home seller’s perspective, what is the advantage of selling to an iBuyer?

A
  • Sell their home quickly
  • Reshape housing environemtn with tech Savy
42
Q

(Kiger, 2021)
What key trade-off did the researchers identify that made residential real estate intermediation especially difficult for iBuyers?

A
  • Trade off between prediciting market value of property and the need for spped prevents accurate evaluation (Through things like walkthroughs)
43
Q

(Kiger, 2021)
Why did iBuyers lose money/Zillow go bust, despite having access to lots of data and powerful algorithms?

A
  • Balance sheet volatility
  • Worse in markets with low liquidity (Difficult to sell a home quickly unless the price is signficantly discounted)
  • Data is difficult to grasp what influences what human buyers are willing to pay for a house (E.g. Noise level)
  • Lemons Problem: Leoms are more likely to sell homes increasing risk of overpaying for home, that they will have trouble reselling without heavy discounts
44
Q

Wyness et al. (2021)
How does human capital theory differ from signalling theory?

A
  • Human capital theory: Investment in education makes individuals more productive
  • Signalling theory: Education does not increase productivity but it signals that pre-exisitng abilities . This solves the issue of imperfect information in te hiring process.
45
Q

Wyness et al. (2021)
How can we distinguish between these theories empirically? Explain using an example of one study.

A
  • Maurin and Mcnally: 1968 Paris riots therefore there were easier exams and employers offered them lower wages which shows effect of human capital on wages
  • Jaeger and Page: Find evidence of signalling
46
Q

Wyness et al. (2021)
Why might statistical discrimination by employers be mistaken for signalling?

A
  • Educational qualification setting the inital wages. It is human capital theory as it describes how employers deal with risk, information costs associated with varying degrees of certainity about different groups productivity levels.
  • This can be mistaken for signalling, but signalling is where you acquire education to prove their ability.
47
Q

Wyness et al. (2021)
Feng and Graetz (2017) compare LSE students who obtained very similar marks in their exams, but who obtained either a first or a 2.1 degree. What do they find?

A
  • Higher degree grade = positively affected a graduates probability of working in a higher wage industry, improving earnings after graduation.

EC2A3 (10 decks)

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