Tsinghua_2005MBA_Lecture_15(Markets with asymmetric information).pptVIP

Chapter 1 Lecture 15 Markets with Asymmetric Information Topics to be Discussed Quality Uncertainty and the Market for Lemons Market Signaling Moral Hazard The Principal-Agent Problem Topics to be Discussed Managerial Incentives in an Integrated Firm Asymmetric Information in Labor Markets: Efficiency Wage Theory Introduction We will study how imperfect information influences resource allocation and the price system. Example: “Lemons” Problem In June, 1999, I was a visiting scholar in University of Sydney. I bought a heater at the price of $40. When I leave the Sydney, I want to sell the heater to the second-hand store. Can you guess how much the store want to pay me for the heater? (note: The heater is good in quality) Example: “Lemons” Problem The store only wanted to pay me only $2 for the heater. Why? Explanations for the lemon A lemons problem arises due to asymmetric information about product quality. For example, in the used heater market buyers determine the prices they are willing to pay according to their belief regarding the average quality of the heaters offered for sale. Sellers, in contrast, know the quality of their heaters and base the asking prices on the quality of the individual heaters to be sold. In this framework, the seller of the highest quality heater will never be able to get a price which properly reflects that quality. As a result, this seller will not offer her heater for sale in the market. But now, the seller of the second highest quality heater will not be able to get a price that reflects the quality of the heater she is offering, and will also withdraw it from the market. This process may continue until only the lowest quality heaters are offered in the market. Quality Uncertaintyand the Market for Lemons The lack of complete information when purchasing a used car increases the risk of the purchase and lowers the value of the car. Quality Uncertaintyand the Market for Lemons The Market for Used Ca