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1、Chapter 17Markets with Asymmetric InformationChapter 17Slide 2Topics to be DiscussednQuality Uncertainty and the Market for LemonsnMarket SignalingnMoral HazardnThe Principal-Agent ProblemChapter 17Slide 3Topics to be DiscussednManagerial Incentives in an Integrated FirmnAsymmetric Information in La

2、bor Markets: Efficiency Wage TheoryChapter 17Slide 4IntroductionnWe will study how imperfect information influences resource allocation and the price system.Chapter 17Slide 5Quality Uncertaintyand the Market for LemonsnThe lack of complete information when purchasing a used car increases the risk of

3、 the purchase and lowers the value of the car.Chapter 17Slide 6nThe Market for Used CarslAssumeuBuyers and sellers can distinguish between high and low quality carsuThere will be two marketsQuality Uncertaintyand the Market for LemonsThe Lemons ProblemPHPLQHQLSHSLDHDL5,00050,00050,000The market for

4、high and lowquality cars when buyers and sellerscan identify each car10,000DLDMDM75,00025,000With asymmetric information buyers will find it difficult to determine quality. They lower their expectations of the average quality ofused cars. Demand for low and high quality used cars shifts to DM.DLMDLM

5、The increase in QLreduces expectations anddemand to DLM. The adjustment processcontinues until demand = DL. Chapter 17Slide 8nThe Market for Used CarslWith asymmetric information:uLow quality goods drive high quality goods out of the market.uThe market has failed to produce mutually beneficial trade

6、.uToo many low and too few high quality cars are on the market.uAdverse selection occurs; the only cars on the market will be low quality cars.Quality Uncertaintyand the Market for LemonsChapter 17Slide 9Implications of Asymmetric InformationnMedical InsurancelQuestionuIs it possible for insurance c

7、ompanies to separate high and low risk policy holders?lIf not, only high risk people will purchase insurance.lAdverse selection would make medical insurance unprofitable.The Market for InsuranceChapter 17Slide 10Implications of Asymmetric InformationnAutomobile InsurancelQuestionsuWhat impact does a

8、symmetric information and adverse selection have on insurance rates and the delivery of automobile accident insurance?uHow can the government reduce the impact of adverse selection in the insurance industry?The Market for InsuranceChapter 17Slide 11Implications of Asymmetric InformationnThe Market f

9、or CreditlAsymmetric information creates the potential that only high risk borrowers will seek loans.lQuestionuHow can credit histories help make this market more efficient and reduce the cost of credit?Chapter 17Slide 12Implications of Asymmetric InformationnThe Importance of Reputation and Standar

10、dizationlAsymmetric Information and Daily Market DecisionsuRetail salesuAntiques, art, rare coinsuHome repairsuRestaurantsChapter 17Slide 13Implications of Asymmetric InformationnQuestionlHow can these producers provide high-quality goods when asymmetric information will drive out high-quality goods

11、 through adverse selection.lAnsweruReputationChapter 17Slide 14Implications of Asymmetric InformationnQuestionlWhy do you look forward to a Big Mac when traveling even though you would never consider buying one at home.nHoliday Inn once advertised “No Surprises” to address the issue of adverse selec

12、tion.Chapter 17Slide 15Lemons in Major League BaseballnAsymmetric information and the market for free agentslIf a lemons market exists, free agents should be less reliable (disabled) than renewed contracts.Chapter 17Slide 16Player DisabilityAll Players4.7312.55165.4Renewed players4.769.68103.4Free a

13、gents4.6717.23268.9Days Spent on Disabled List per SeasonPrecontractPostcontract Percentage ChangeChapter 17Slide 17nFindingslDays on the disabled list increase for both free agents and renewed players.lFree agents have a significantly higher disability rate than renewed players.lThis indicates a le

14、mons market.Lemons in Major League BaseballChapter 17Slide 18nQuestionlIf you are a team owner, what steps would you take to reduce the asymmetric information for free agents?Lemons in Major League BaseballChapter 17Slide 19Market SignalingnThe process of sellers using signals to convey information

15、to buyers about the products quality helps buyers and sellers deal with asymmetric information.Chapter 17Slide 20Market SignalingnStrong SignallTo be effective, a signal must be easier for high quality sellers to give than low quality sellers.lExampleuHighly productive workers signal with educationa

16、l attainment level. Chapter 17Slide 21Market SignalingnA Simple Model of Job Market SignalinglAssumeuTwo groups of workerslGroup I: Low productivity-AP & MP = 1lGroup II: High productivity-AP & MP = 2lThe workers are equally divided between Group I and Group II-AP for all workers = 1.5Chapter 17Slid

17、e 22Market SignalingnA Simple Model of Job Market SignalinglAssumeuCompetitive Product MarketlP = $10,000lEmployees average 10 years of employmentlGroup I Revenue = $100,000 (10,000/yr. x 10)lGroup II Revenue = $200,000 (20,000/yr. X 10)Chapter 17Slide 23Market SignalingnWith Complete Informationlw

18、= MRPlGroup I wage = $10,000/yr.lGroup II wage = $20,000/yr.nWith Asymmetric Informationlw = average productivitylGroup I & II wage = $15,000Chapter 17Slide 24Market SignalingnSignaling With Education to Reduce Asymmetric Informationly = education index (years of higher education)lC = cost of attain

19、ing educational level ylGroup I-CI(y) = $40,000ylGroup II-CII(y) = $20,000yChapter 17Slide 25Market SignalingnSignaling With Education to Reduce Asymmetric InformationlAssume education does not increase productivitylDecision Rule:uy* signals GII and wage = $20,000uBelow y* signals GI and wage = $10,

20、000SignalingYears ofCollegeValue ofCollegeEduc.0$100KValue ofCollegeEduc.Years ofCollege1234560123456$200K$100K$200KGroup IGroup IICI(y) = $40,000yOptimal choice of y for Group IHow much educationshould a person obtain?The education decisionis based on benefits/costcomparison.B(y)B(y)y*y*B(y) = incr

21、ease inwage associated witheach level of educationCII(y) = $20,000yOptimal choice of y for Group ISignalingYears ofCollegeValue ofCollegeEduc.0$100KValue ofCollegeEduc.Years ofCollege1234560123456$200K$100K$200KCI(y) = $40,000yOptimal choice of y for Group IB(y)B(y)y*y*Benefits = $100,000CostCI(y) =

22、 40,000y$100,000 2.5Choose no educationCII(y) = $20,000yOptimal choice of y for Group IBenefits = $100,000CostCII(yO)= 20,000y$100,000$20,000y*y* Qf ;B = .3Qf + .2(Q - Qf)uIf Q Qf ;B = .3Qf - .5(Qf - Q)Chapter 17Slide 62Incentive Design in an Integrated FirmOutput(units per year)2,0004,0006,00010,00

23、0010,00020,00030,00040,000Bonus($ peryear)8,000If Qf = 30,000,bonus is $6,000,the maximumamount possible.Qf = 30,000Qf = 10,000If Qf = 10,000,bonus is $5,000Qf = 20,000If Qf = 20,000,bonus is $4,000Chapter 17Slide 63Asymmetric Information in Labor Markets: Efficiency Wage TheorynIn a competitive lab

24、or market, all who wish to work will find jobs for a wage equal to their marginal product.lHowever, most countries economies experience unemployment.Chapter 17Slide 64nThe efficiency wage theory can explain the presence of unemployment and wage discrimination.lIn developing countries, productivity d

25、epends on the wage rate for nutritional reasons.Asymmetric Information in Labor Markets: Efficiency Wage TheoryChapter 17Slide 65nThe shirking model can be better used to explain unemployment and wage discrimination in the United States.lAssumes perfectly competitive marketslHowever, workers can wor

26、k or shirk.lSince performance information is limited, workers may not get fired.Asymmetric Information in Labor Markets: Efficiency Wage TheoryChapter 17Slide 66Without shirking, the market wageis w*, and full-employment exists at L*Demand forLaborw*L*SLUnemployment in a Shirking ModelQuantity of La

27、borWageNo-ShirkingConstraintThe no-shirkingconstraint givesthe wage necessaryto keep workers from shirking.weLeAt the equilibrium wage, We the firm hires Le workerscreating unemployment of L* - Le.Chapter 17Slide 67Efficiency Wages at Ford Motor CompanynLabor turnover at Ford l1913: 380%l1914: 1000%

28、uAverage pay = $2 - $3uFord increased pay to $5Chapter 17Slide 68Efficiency Wages at Ford Motor CompanynResultslProductivity increased 51%lAbsenteeism had been halvedlProfitability rose from $30 million in 1914 to $60 million in 1916.Chapter 17Slide 69SummarynAsymmetric information creates a market

29、failure in which bad products tend to drive good products out of the market.nInsurance markets frequently involve asymmetric information because the insuring party has better information about the risk involved than the insurance company.Chapter 17Slide 70SummarynAsymmetric information may make it costly for the owners of firms to monitor accurately the behavior of the firms manager.nAsymmetric information can explain why labor markets have substantial unemployment when some workers are actively seeking work. End of Chapter 17Markets with Asymmetric Information