Asymmetric Information
• • • • • • asymmetric v imperfect information strategic misrepresentation adverse selection appraisal screening signaling
Zhigang Tao 1
Zhigang Tao
3
Question-3
• How to convince a potential employer that you are loyal and productive?
Managerial Economics
Zhigang Tao
4
Imperfect Information
Managerial Economics
Zhigang Tao
10
Please be assured…
• prepackaging fruits and vegetables in grocery stores • “block-booking” a set of movies from a given studio • paying percentage royalties to book authors • supplying products with warranties and money-back guarantees
Managerial Economics Zhigang Tao 11
Managerial Economics Zhigang Tao 8
A Paradox
• It is possible and profitable for one or both trading parties to gain a bargaining advantage by investing in information about the quality of the good. However, private information may completely prevent agreement even though there are significant gains to be had from trade.
Managerial Economics
Question-1
• “Life insurance for everyone: No questions asked, no medical examination.” Good or bad deal?
Managerial Economics
Zhigang Tao
2
Question-2
• Suppose a medical insurer decides to cover pregnancy, should it offer pregnancy as an option or as part of the basic program?
ቤተ መጻሕፍቲ ባይዱ
Managerial Economics
• distinguish: – imperfect information – asymmetric information • risk: uncertainty about benefits or costs – arises from imperfect information – risk aversion – insurance
Managerial Economics Zhigang Tao 9
The De Beers Practice
• Buyers are offered a packet of stones, called “sight”, that roughly corresponds to their indicated interests. The stones are graded and sorted on the basis of their gross characteristics only, without any attempt by De Beers to estimate their value closely.
7
trade trade
Zhigang Tao
Strategic Misrepresentation
• Sometimes it is impossible to find any prices that always make it in the parties’ individual interest to report truthfully and to trade whenever trade is value increasing. • Efficient trade is more difficult to achieve when the probability of seller (buyer) having low cost (high value) is higher.
Managerial Economics Zhigang Tao 5
Bargain Over a Trade
• The buyer’s value is expected to be either $1 (20%) or $3 (80%). • The seller’s cost is expected to be either $0 (80%) or $2 (20%). • Only the buyer knows the true value, and only the seller knows the true cost.
Managerial Economics
Zhigang Tao
6
Efficient Outcomes
seller’s cost $0 (80%) buyer’s value $1 (20%) buyer’s value $3 (80%)
Managerial Economics
seller’s cost $2 (20%) no trade trade