Economics of Information (Chapter

5)

Explain how asymmetrical information creates economic problems

Understand how the subprime mortgage crisis was a moral hazard issue

Explain how branding can create monopolies

Learning Objectives

Asymmetrical Information- A situation in which one party in a transaction has more or superior information compared to another.

Asymmetrical Information

What are some problems caused by asymmetry of information?

Information

Naked Economics: How does buying a used car illustrate the problems caused by asymmetry of information?

The End of Asymmetric information: Why does the author believe asymmetric information in the market for cars will no longer be a problem in the future?

Asymmetrical Information

What is the moral hazard problem and how do reputation mechanisms work to reduce it?

Moral Hazard

Exists when one person does not have to suffer the consequences personally yet can receive rewards

Paul Krugman described moral hazard as "any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly.”

Moral Hazard

Mortgage- A debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments.

Foreclosure- A situation in which a homeowner is unable to make full principal and interest payments on his/her mortgage , which allows the lender to seize the property, evict the homeowner and sell the home

Subprime loan- a risky loan to people who are likely to default

Subprime Mortgage crisis

Mortgage backed security: A type of asset-backed security that is secured by a collection of mortgages.

Subprime Mortgage crisis

How can technology principle agent problems? Example

Asymmetrical Information

How are the problems in the healthcare system related to information issues?

How does the solution of the “personal mandate” solve a problem of information in the health care industry?

Information in Health Care

Why do businesses spend so much money creating an effective brand?

Information

How does an absence of or partial information lead to discrimination?

What do you think about the racial profiling example? 124-125

Statistical Discrimination

What is the relationship between poverty and human capital?

Human Capital =the skills, knowledge, and experience possessed by an individual or population, viewed in terms of their value or cost to an organization or country.

Investopedia is a good resource http://www.investopedia.com/terms/h/humancapital.asp

Human Capital

Earnings by Education

•What would happen to salaries if all Americans had a college degree?•What do you think would happen to Income inequality?