Asymmetric Information in Microeconomics

Flashcards covering key concepts from the lecture on asymmetric information, including definitions and important examples.

Asymmetric Information

An imbalance of information across participants in a transaction, particularly when one party knows more than the other.

Lemons Problem

A situation in which quality differences in products lead to adverse selection, particularly in the used car market where sellers know more about vehicle quality than buyers.

Adverse Selection

A situation where there are stronger incentives for 'bad' types of a product to be involved in a transaction than 'good' types, often due to information asymmetry.

Moral Hazard

A situation occurring when one party in a transaction cannot observe the other party's behavior, leading to the potential for unethical behavior or risk-taking.

Signaling

An action taken by informed parties to reveal information to less-informed parties, often used to communicate quality.

Principal-Agent Relationship

An economic relationship where one party (the principal) hires another (the agent) to perform a task, complicating the monitoring of the agent's actions.

Quality Characteristics

Attributes of a product that indicate its level of quality, which are often unknown to buyers in the presence of asymmetric information.

Screening

The process through which sellers or buyers gather more information about the parties involved in a transaction to differentiate between high and low quality.

Group Policies

Insurance policies that pool risk among many individuals, helping to mitigate adverse selection in insurance markets.

Mechanisms to Mitigate Asymmetric Information

Methods such as warranties, third-party inspections, and reputation systems employed to reduce the impact of information asymmetry on market transactions.