Economics of Information and Market Failures

These flashcards cover key terms and concepts related to the Economics of Information and market failures such as asymmetric information, adverse selection, and moral hazard.

Economics of Information (E.I.)

A branch of economics that analyzes contracts under conditions of private information and uncertainty.

Asymmetric Information (A.I.)

A situation in which one party in a transaction has more or better information than the other, leading to market inefficiencies.

Adverse Selection

A condition where one party to a transaction has more information, leading to undesirable goods remaining unsold due to information asymmetry.

Moral Hazard

A situation where a party engages in risky behavior because they are insulated from the consequences, often due to insurance or contracts.

The Market for Lemons

An example illustrating adverse selection using used cars, where sellers have more information about car quality than buyers.

Principal-Agent Problem

A scenario where one party (the principal) hires another party (the agent) to perform tasks, and there is information asymmetry affecting the agent's actions.

Hidden Action

Actions taken by one party in a transaction that are not observable by the other party, often leading to moral hazard.

Hidden Characteristics

Qualities of a product or person that are not known to all parties involved in a transaction, contributing to information asymmetry.

Contract Theory

A framework for understanding how contracts are structured within the Economics of Information.

Agency Theory

A branch of economics that studies the relationship between principals and agents, particularly under conditions of information asymmetry.