Asymmetric Information and Market Dynamics

Flashcards covering key concepts related to asymmetric information, market dynamics, adverse selection, and related examples.

Asymmetric Information

Occurs when one party has more information than the other in a transaction.

Symmetric Information

A situation where the buyer and seller have the same amount of information.

Adverse Selection

When the more informed party uses their knowledge advantage to benefit themselves, often leading to negative outcomes.

Health Insurance Example

Illustrates adverse selection where individuals have varying health statuses, and insurance companies cannot distinguish between them.

Signaling

Occurs when the more informed group attempts to credibly communicate information to the less informed group.

Warranties

A signal of product quality; offering warranties indicates that a firm believes its product is reliable.

Moral Hazard

The risk that insurance coverage leads to risky behavior, as individuals alter their actions when protected.

Single Payer System

A healthcare system where the government pays for health insurance, intended to mitigate adverse selection issues.

Market Failure

Occurs when a free market does not allocate resources efficiently, often due to asymmetric information.

Example of Used Car Market

A classic scenario of asymmetric information where sellers know more about the car's condition than buyers.

Designated Hitter Rule

A rule introduced in MLB that allows teams to designate a player to bat in place of the pitcher, altering competitive behavior.