Summary
Summary Economics 244
- Course
- Economics 244
- Institution
- Stellenbosch University (SUN)
Asymmetric information neatly presented and summarised for the exams
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CHAPTER 8Assymetric Information
Assymetric Information: Adverse selecion and moral hazard
- Asymmetric Infromation: Differences in infromation availabe to buyers and sellers
- Adverse selection Occurs before a transaction occurs. -> Big risk-takers are often the most
eager to take out a loan ex-ante.
- Moral hazard arises after a transaction has developed. -> Borrowers may engage in risk-
taking activities ex-post
- Agency theory analyses how asymmetric information problems affect economic behaviour.
The Lemons Problems: How Adverse selection Influences Financial Structure
- If quality cannot be assessed, the buyer is willing to pay at most a price that reflects the
average quality
- seller of good quality item will not want to sell at the price for average quality
- the buyer will decide not to buy at all because all that is left in the market is poor quality
items
How Moral hazard Affects the Choice between debt and equity contracts
- called the principal-Agent Prolem:
-Principal: less information (stockholder)
- Agent: more information (manager)
- Seperation of ownership and control of the firm
- Managers pursue personal benefits and power rather than the profitability of the firm
How Moral hazard influences Fianncial Structure in Debt Markets
- borrowers have incentive to take on projects that are riskier than the lenders would like
-this prevents the borrower from paying back the loan
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