Chapter 10: Information. In this chapter you will learn: What information asymmetries are, and why they matter for economic decision making; how to differentiate between screening and signaling and describe some applications of each; how reputations can help to solve information problems;. | Chapter 10 Information © 2014 by McGraw‐Hill Education 1 What will you learn in this chapter? • What information asymmetries are, and why they matter for economic decision making. – Adverse selection. – Moral hazard. • How to differentiate between screening and signaling and describe some applications of each. • How reputations can help to solve information problems. • How statistical discrimination might be used to solve information problems. • The uses and limitations of education and regulation in overcoming information asymmetry problems. © 2014 by McGraw‐Hill Education 2 Information: Knowledge is power • Many times in economic analyses it is assumed that individuals are fully informed. – Individuals have complete information when they are fully informed about the choices that they and other relevant economic actors face. – For example, buyers and sellers understand the quality, availability, and prices of comparable goods when engaging in transactions. • Rarely do individuals have perfectly complete information. – Often they have sufficient information to make acceptable choices. – Sometimes it may lead to poor outcomes. © 2014 by McGraw‐Hill Education 3 1 Information asymmetry • When one person knows more than the other during an agreement, information asymmetry occurs. • When one person knows much more than the other, that person can achieve what he wants at the other’s expense. – This occurs only because both parties’ incentives are not aligned. – If both parties incentives are aligned, then information asymmetries do not matter. © 2014 by McGraw‐Hill Education 4 Information asymmetry • Two important types of information asymmetry are: – Adverse selection: Occurs prior to completing an agreement when buyers and sellers have different information about the quality of a good or the riskiness of a situation. • Relates to unobserved characteristics. – .
