slide1 l.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
FIN 444 Asymmetric Information A situation where one party to a market transaction has much more information about a pro PowerPoint Presentation
Download Presentation
FIN 444 Asymmetric Information A situation where one party to a market transaction has much more information about a pro

Loading in 2 Seconds...

play fullscreen
1 / 9

FIN 444 Asymmetric Information A situation where one party to a market transaction has much more information about a pro - PowerPoint PPT Presentation


  • 411 Views
  • Uploaded on

FIN 444 Asymmetric Information A situation where one party to a market transaction has much more information about a product or service than the other. Moral Hazard Problem There is a tendency of one party to a contract to alter his/her behaviour in ways that are costly to the other party .

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'FIN 444 Asymmetric Information A situation where one party to a market transaction has much more information about a pro' - emily


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
slide1

FIN 444Asymmetric InformationA situation where one party to a market transaction has much more information about a product or service than the other.

slide2

Moral Hazard ProblemThere is a tendency of one party to a contract to alter his/her behaviour in ways that are costly to the other party

.

slide3

Adverse Selection ProblemInformation known by the first party to a contract is unknown to the second and, as a result, the second party incurs major costs.

slide4

Used Cars: The Market for “Lemons”A new car loses much of its market value as the buyers drives it off the sales lot. The question is, why?

slide5
One explanation relates to inadequate information about used cars, some are good and some are “lemons” of poor quality.
slide6

Consumers cannot distinguish the good from the defective, so a single price emerges for used cars, which roughly reflects the average-quality car.

slide7

This leads to an adverse selection problem. Owner of lemons have an incentive to sell their cars because the average price is above that for the low-quality car they own.

slide8

Therefore, there will be proportionately more low-quality cars offered than good-quality cars whose owners hold onto them rather than offer them at the average-quality price.

slide9

At the extreme, only lemons would appear on the used-car market, but even without the extreme, this theory offers one explanation of the pricing of used cars.