chapterchapterseventeenseventeen©2006PrenticeHallBusinessPublishingEconomicsR.GlennHubbard,AnthonyPatrickO’Brien—1sted.Preparedby:Fernando&YvonnQuijanoTheEconomicsofInformation2of14©2006PrenticeHallBusinessPublishingEconomicsR.GlennHubbard,AnthonyPatrickO’Brien—1sted.CHAPTER17TheEconomicsofInformationAfterstudyingthischapter,youshouldbeableto:Defineasymmetricinformationanddistinguishbetweenmoralhazardandadverseselection.Applytheconceptsofadverseselectionandmoralhazardtofinancialmarkets.Applytheconceptsofadverseselectionandmoralhazardtolabormarkets.Explainthewinner’scurseandwhyitoccurs.StateFarmExperiencestheHazardsofSellingInsuranceLEARNINGOBJECTIVES1234Inthemarketforinsurance,asymmetricinformationleadstotwoproblems:adverseselectionandmoralhazard.3of14©2006PrenticeHallBusinessPublishingEconomicsR.GlennHubbard,AnthonyPatrickO’Brien—1sted.CHAPTER17TheEconomicsofInformationAsymmetricInformationLEARNINGOBJECTIVE1AsymmetricinformationWhenonepartytoaneconomictransactionhaslessinformationthantheotherparty.AdverseSelectionandtheMarketfor“Lemons”AdverseselectionThesituationinwhichonepartytoatransactiontakesadvantageofknowingmorethantheotherpartytothetransaction.4of14©2006PrenticeHallBusinessPublishingEconomicsR.GlennHubbard,AnthonyPatrickO’Brien—1sted.CHAPTER17TheEconomicsofInformationAsymmetricInformationReducingAdverseSelectionintheCarMarket1.Newcarsthatneedseveralmajorrepairsduringthefirstyearortwoafterthedateoftheoriginalpurchasemaybereturnedtothemanufacturerforafullrefund.2.Carmanufacturersmustindicatewhetherausedcartheyareofferingforsalewasrepurchasedfromtheoriginalownerasalemon.5of14©2006PrenticeHallBusinessPublishingEconomicsR.GlennHubbard,AnthonyPatrickO’Brien—1sted.CHAPTER17TheEconomicsofInformationAdverseSelection,Annuities,andSocialSecurityReform17-1Peoplewhobuyannuitieslivelongerthanpeoplewhodon’t.6of14©2006PrenticeHallBusinessPublishingEconomicsR.GlennHubbard,AnthonyPatrickO’Brien—1sted.CHAPTER17TheEconomicsofInformationDoesAdverseSelec...
