Frontiers of Microeconomics Chapter 22
Frontiers of Microeconomics Chapter 22
Outline The economics of asymmetric information ● Political economics e Behavioral economics
Outline • The economics of asymmetric information • Political economics • Behavioral economics
Asymmetric Information o a difference in access to relevant knowledge is called an information asymmetry Examples: Hidden action Hidden characteristic
Asymmetric Information • A difference in access to relevant knowledge is called an information asymmetry • Examples: – Hidden action – Hidden characteristic
Hidden actions ° Agent a person who is performing an act for another person called the principal ● Principal a person for whom another person, called the agent, is performing some act o Moral hazard The tendency of a person who is simperfec tI monitored to gage in dishonest or otherwise undesirable behavior
Hidden Actions • Agent – a person who is performing an act for another person called the principal. • Principal – a person for whom another person, called the agent, is performing some act. • Moral hazard – The tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior
Hidden Characteristics: Adverse Selection and the Lemons problem ● Adverse selection: The tendency for the mix unobserved attributes to become undesirable from the standpoint of an uniformed party. Examples: used car, labor market, health Insurance
Hidden Characteristics: Adverse Selection and the Lemons Problem • Adverse selection: – The tendency for the mix unobserved attributes to become undesirable from the standpoint of an uniformed party. • Examples: used car, labor market, health insurance
Signaling and Screening °5 ignaling An action taken by an informed party to reveal private information to an unformed arty Examples: advertising, diploma e Screening An action taken by an uninformed party to induce an informed party to reveal information Examples: used car, car insurance
Signaling and Screening • Signaling: – An action taken by an informed party to reveal private information to an unformed party. • Examples: advertising, diploma • Screening: – An action taken by an uninformed party to induce an informed party to reveal information. • Examples: used car, car insurance
Asymmetric Information and public policy y e Asymmetric information may call for government action in some cases, but there are some issues else o The private market can sometimes deal with information asymmetries itself o The government rarely has more information than the private parties The government is itself an imperfect institution
Asymmetric Information and Public Policy • Asymmetric information may call for government action in some cases, but there are some issues else: • The private market can sometimes deal with information asymmetries itself. • The government rarely has more information than the private parties. • The government is itself an imperfect institution
Political Economy o Before we embrace an activist government we need to consider one more fact: the government is also an imperfect institution o The Condorcet paradox Arrow' s impossibility theorem The median voter theorem e Politicians with self-interest motive
Political Economy • Before we embrace an activist government, we need to consider one more fact: the government is also an imperfect institution. • The Condorcet paradox • Arrow’s impossibility theorem • The Median voter theorem • Politicians with self-interest motive
The Condorcet Voting paradox /oter Type Type 1 ype 2 Type 3 Percent of electorate 35 45 20 First Choice A B C Second choice B C A Third choice A B
The Condorcet Voting Paradox Voter Type Type 1 Type 2 Type 3 Percent of electorate 35 45 20 First Choice A B C Second Choice B C A Third Choice C A B
The Condorcet Voting paradox Condorcet paradox: the failure of majority rule to produce transitive preferences for ety The order on which things are voted can affect the result ● The narrow lesson ● The broad lesson
The Condorcet Voting Paradox • Condorcet paradox: the failure of majority rule to produce transitive preferences for society. • The order on which things are voted can affect the result. • The narrow lesson • The broad lesson