1、Chapter Thirty-Six,Asymmetric Information 不对称信息,Information in Competitive Markets,In purely competitive markets all agents are fully informed about traded commodities and other aspects of the market. What about markets for medical services, or insurance, or used cars?,Asymmetric Information in Mark
2、ets,A doctor knows more about medical services than does the buyer. An insurance buyer knows more about his riskiness than does the seller. A used cars owner knows more about it than does a potential buyer.,Asymmetric Information in Markets,Markets with one side or the other imperfectly informed are
3、 markets with imperfect information(不完全信息). Imperfectly informed markets with one side better informed than the other are markets with asymmetric information(不对称信息).,Asymmetric Information in Markets,In what ways can asymmetric information affect the functioning of a market? Four applications will b
4、e considered: adverse selection (逆向选择) signaling (信号传递) moral hazard (道德风险) incentives contracting.,Adverse Selection,Consider a used car market. Two types of cars; “lemons” and “peaches”. Each lemon seller will accept $1,000; a buyer will pay at most $1,200. Each peach seller will accept $2,000; a
5、buyer will pay at most $2,400.,Adverse Selection,If every buyer can tell a peach from a lemon, then lemons sell for between $1,000 and $1,200, and peaches sell for between $2,000 and $2,400. Gains-to-trade are generated when buyers are well informed.,Adverse Selection,Suppose no buyer can tell a pea
6、ch from a lemon before buying. What is the most a buyer will pay for any car?,Adverse Selection,Let q be the fraction of peaches. 1 - q is the fraction of lemons. Expected value to a buyer of any car is at most,Adverse Selection,Suppose EV $2000. Every seller can negotiate a price between $2000 and
7、$EV (no matter if the car is a lemon or a peach). All sellers gain from being in the market.,Adverse Selection,Suppose EV $2000. A peach seller cannot negotiate a price above $2000 and will exit the market. So all buyers know that remaining sellers own lemons only. Buyers will pay at most $1200 and
8、only lemons are sold.,Adverse Selection,Hence “too many” lemons “crowd out” the peaches from the market. Gains-to-trade are reduced since no peaches are traded. The presence of the lemons inflicts an external cost on buyers and peach owners.,Adverse Selection,How many lemons can be in the market wit
9、hout crowding out the peaches? Buyers will pay $2000 for a car only if,Adverse Selection,How many lemons can be in the market without crowding out the peaches? Buyers will pay $2000 for a car only if So if over one-third of all cars are lemons, then only lemons are traded.,Adverse Selection,A market
10、 equilibrium in which both types of cars are traded and cannot be distinguished by the buyers is a pooling equilibrium. A market equilibrium in which only one of the two types of cars is traded, or both are traded but can be distinguished by the buyers, is a separating equilibrium.,Adverse Selection
11、,What if there is more than two types of cars? Suppose that car quality is uniformly distributed between $1000 and $2000 any car that a seller values at $x is valued by a buyer at $(x+300). Which cars will be traded?,Adverse Selection,Seller values,1000,2000,Adverse Selection,1000,2000,1500,Seller v
12、alues,Adverse Selection,1000,2000,1500,The expected value of any car to a buyer is $1500 + $300 = $1800.,Seller values,Adverse Selection,1000,2000,1500,The expected value of any car to a buyer is $1500 + $300 = $1800.,So sellers who value their cars at more than $1800 exit the market.,Seller values,
13、Adverse Selection,1000,1800,The distribution of values of cars remaining on offer,Seller values,Adverse Selection,1000,1800,1400,Seller values,Adverse Selection,1000,1800,1400,The expected value of any remaining car to a buyer is $1400 + $300 = $1700.,Seller values,Adverse Selection,1000,1800,1400,T
14、he expected value of any remaining car to a buyer is $1400 + $300 = $1700.,So now sellers who value their cars between $1700 and $1800 exit the market.,Seller values,Adverse Selection,Where does this unraveling of the market end? Let vH be the highest seller value of any car remaining in the market.
15、 The expected seller value of a car is,Adverse Selection,So a buyer will pay at most,Adverse Selection,So a buyer will pay at most This must be the price which the seller of the highest value car remaining in the market will just accept; i.e.,Adverse Selection,Adverse selection drives out all cars v
16、alued by sellers at more than $1600.,Adverse Selection with Quality Choice,Now each seller can choose the quality, or value, of her product. Two umbrellas; high-quality and low-quality. Which will be manufactured and sold?,Adverse Selection with Quality Choice,Buyers value a high-quality umbrella at
17、 $14 and a low-quality umbrella at $8. Before buying, no buyer can tell quality. Marginal production cost of a high-quality umbrella is $11. Marginal production cost of a low-quality umbrella is $10.,Adverse Selection with Quality Choice,Suppose every seller makes only high-quality umbrellas. Every
18、buyer pays $14 and sellers profit per umbrella is $14 - $11 = $3. But then a seller can make low-quality umbrellas for which buyers still pay $14, so increasing profit to $14 - $10 = $4.,Adverse Selection with Quality Choice,There is no market equilibrium in which only high-quality umbrellas are tra
19、ded. Is there a market equilibrium in which only low-quality umbrellas are traded?,Adverse Selection with Quality Choice,All sellers make only low-quality umbrellas. Buyers pay at most $8 for an umbrella, while marginal production cost is $10. There is no market equilibrium in which only low-quality
20、 umbrellas are traded.,Adverse Selection with Quality Choice,Now we know there is no market equilibrium in which only one type of umbrella is manufactured. Is there an equilibrium in which both types of umbrella are manufactured?,Adverse Selection with Quality Choice,A fraction q of sellers make hig
21、h-quality umbrellas; 0 q 1. Buyers expected value of an umbrella is EV = 14q + 8(1 - q) = 8 + 6q. High-quality manufacturers must recover the manufacturing cost, EV = 8 + 6q 11 q 1/2.,Adverse Selection with Quality Choice,So at least half of the sellers must make high-quality umbrellas for there to
22、be a pooling market equilibrium. But then a high-quality seller can switch to making low-quality and increase profit by $1 on each umbrella sold.,Adverse Selection with Quality Choice,Since all sellers reason this way, the fraction of high-quality sellers will shrink towards zero - but then buyers w
23、ill pay only $8. So there is no equilibrium in which both umbrella types are traded.,Adverse Selection with Quality Choice,The market has no equilibrium with just one umbrella type traded with both umbrella types traded so the market has no equilibrium at all. Adverse selection has destroyed the ent
24、ire market!,Signaling,Adverse selection is an outcome of an informational deficiency. What if information can be improved by high-quality sellers signaling credibly that they are high-quality? E.g. warranties, professional credentials, references from previous clients etc. But some form of signaling
25、 may be inefficient ,Signaling,A labor market has two types of workers; high-ability and low-ability. A high-ability workers marginal product is aH. A low-ability workers marginal product is aL. aL aH.,Signaling,A fraction h of all workers are high-ability. 1 - h is the fraction of low-ability worke
26、rs.,Signaling,Each worker is paid his expected marginal product. If firms knew each workers type they would pay each high-ability worker wH = aH pay each low-ability worker wL = aL.,Signaling,If firms cannot tell workers types then every worker is paid the (pooling) wage rate; i.e. the expected marg
27、inal product wP = (1 - h)aL + haH.,Signaling,wP = (1 - h)aL + haH aH, the wage rate paid when the firm knows a worker really is high-ability. So high-ability workers have an incentive to find a credible signal.,Signaling,Workers can acquire “education”. Education costs a high-ability worker cH per u
28、nit and costs a low-ability worker cL per unit. cL cH.,Signaling,Suppose that education has no effect on workers productivities; i.e., the cost of education is a deadweight loss.,Signaling,High-ability workers will acquire eH education units if (i) wH - wL = aH - aL cHeH, and (ii) wH - wL = aH - aL
29、cLeH. (i) says acquiring eH units of education benefits high-ability workers. (ii) says acquiring eH education units hurts low-ability workers.,Signaling,and,together require,Acquiring such an education level credibly signals high-ability, allowing high-ability workers to separate themselves from lo
30、w-ability workers.,Signaling,Q: Given that high-ability workers acquire eH units of education, how much education should low-ability workers acquire? A: Zero. Low-ability workers will be paid wL = aL so long as they do not have eH units of education and they are still worse off if they do.,Signaling
31、,Signaling can improve information in the market. But, total output did not change and education was costly so signaling worsened the markets efficiency. So improved information need not improve gains-to-trade.,Signaling or Human Capital? The Debate,Implications of the two theories are different H.C
32、. theory: government, by subsidizing education, provides a way out of poverty. Signaling: the expenditures do not increase productivity. Socially wasteful. In the signaling model, education is still useful: sorting workers into the right jobs and increasing productivity Education could have positive
33、 social rate of return even if it does not increase a particular workers productivity.,Adverse Selection in Insurance,Bike insuranceSome areas have higher risk of theft than other areas.Insurance premium is based on average risk.Low risk consumers do not buy.Only sell insurance at high risk areas at
34、 high rates. Same with health insurance,Solution in the Insurance Market,Screening for health risks Family history Disease history Mandatory insurance University students Work-unit sponsored Universal coverage,Adverse Selection and Moral Hazard,Adverse selection: hidden information Moral hazard: hid
35、den action,Moral Hazard,If you have full bike insurance are you more likely to leave your bike unlocked? Moral hazard is a reaction to incentives to increase the risk of a loss and is a consequence of asymmetric information.,Moral Hazard,If an insurer knows the exact risk from insuring an individual
36、, then a contract specific to that person can be written. If all people look alike to the insurer, then one contract will be offered to all insurees; high-risk and low-risk types are then pooled, causing low-risks to subsidize high-risks.,Moral Hazard,Examples of efforts to avoid moral hazard by usi
37、ng signals are:higher life and medical insurance premiums for smokers or heavy drinkers of alcohollower car insurance premiums for contracts with higher deductibles or for drivers with histories of safe driving.,Incentives Contracting,A worker is hired by a principal to do a task. Only the worker kn
38、ows the effort she exerts (asymmetric information). The effort exerted affects the principals payoff.,Incentives Contracting,The principals problem: design an incentives contract (激励和约) that induces the worker to exert the amount of effort that maximizes the principals payoff.,Incentives Contracting
39、,e is the agents effort. Principals reward is An incentive contract is a function s(y) specifying the workers payment when the principals reward is y. The principals profit is thus,Incentives Contracting,Let be the workers (reservation) utility of not working. To get the workers participation, the c
40、ontract must offer the worker a utility of at least The workers utility cost of an effort level e is c(e).,Incentives Contracting,So the principals problem is choose e to,subject to,(participationconstraint),To maximize his profit the principal designs the contract to provide the worker with her res
41、ervation utility level. That is, .,Incentives Contracting,the principals problem is to,subject to,(participationconstraint),Incentives Contracting,the principals problem is to,subject to,(participationconstraint),Substitute for and solve,Incentives Contracting,the principals problem is to,subject to
42、,(participationconstraint),The principals profit is maximized when,Substitute for and solve,Incentives Contracting,The contract that maximizes the principals profit insists upon the worker effort level e* that equalizes the workers marginal effort cost to the principals marginal payoff from worker e
43、ffort.,Incentives Contracting,How can the principal induce the worker to choose e = e*?,The contract that maximizes the principals profit insists upon the worker effort level e* that equalizes the workers marginal effort cost to the principals marginal payoff from worker effort.,Incentives Contracti
44、ng,e = e* must be most preferred by the worker.,Incentives Contracting,e = e* must be most preferred by the worker. So the contract s(y) must satisfy the incentive-compatibility (激励相容) constraint;,Rental Contracting,Examples of incentives contracts: (i) Rental contracts: The principal keeps a lump-s
45、um R for himself and the worker gets all profit above R; i.e. Why does this contract maximize the principals profit?,Rental Contracting,Given the contract the workers payoff is and to maximize this the worker should choose the effort level for which,Rental Contracting,How large should be the princip
46、als rental fee R? The principal should extract as much rent as possible without causing the worker not to participate, so R should satisfy i.e.,Other Incentives Contracts,(ii) Wages contracts: In a wages contract the payment to the worker is w is the wage per unit of effort. K is a lump-sum payment.
47、and K makes the worker just indifferent between participating and not participating.,Other Incentives Contracts,(iii) Take-it-or-leave-it: Choose e = e* and be paid a lump-sum L, or choose e e* and be paid zero. The workers utility from choosing e e* is - c(e), so the worker will choose e = e*. L is
48、 chosen to make the worker indifferent between participating and not participating.,Incentives Contracts in General,The common feature of all efficient incentive contracts is that they make the worker the full residual claimant (剩余索取者) on profits. I.e. the last part of profit earned must accrue entirely to the worker.,
