Managerial Economics Jack Wu. NTUC Income: Premiums for $200,000 Life Insurance femalemale civil...
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Transcript of Managerial Economics Jack Wu. NTUC Income: Premiums for $200,000 Life Insurance femalemale civil...
![Page 1: Managerial Economics Jack Wu. NTUC Income: Premiums for $200,000 Life Insurance femalemale civil servant group policy maximum coverage limit no medical.](https://reader036.fdocuments.in/reader036/viewer/2022081512/5697bfab1a28abf838c9ad87/html5/thumbnails/1.jpg)
Managerial EconomicsJack Wu
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NTUC Income: Premiums for $200,000 Life Insurance
female male
civil servant group policy• maximum coverage limit• no medical exam
$240 $240
individual policy• no maximum coverage• medical exam required
$991 $1849
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Imperfect/Asymmetric Informationimperfect information – absence of certain
knowledge (uncertainty)asymmetric information -- one party has better information than the other party with worse information also suffers from
imperfect information
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Riskuncertainty about benefit or costarises from imperfect informationrisk-averse person prefers certain payment to
uncertain payments with same expected value
risk-averse person will buy insurance
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0
2
3
5
7
8
1 2 3 8
supply of good vintage
combined supply of good and bad vintage
actual demand(marginal benefit)
demand (marginal benefit)for good vintage
Quantity (Thousand cases a month)
Pri
ce (
Hun
dre
d $
per
case
)
Wine Market Equilibrium, I
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Wine Market Equilibrium, IIactual demand = combined supply of good
and badat equilibrium price
actual marginal benefit (adjusted for prob of getting bad vintage) = price
actual marginal cost (of good vintage) = price
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Adverse Selectioneconomic inefficiencypossible market failure
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0
2
8
F 8
c
d
combined supply of good and bad vintages
actual demand(marginal benefit)
demand (marginal benefit)for good vintage
Quantity (Thousand cases a month)
Pri
ce (
Hun
dre
d $
per
case
)
Market Failure, I
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Market Failure, IIconventional market: when supply exceeds
demand, lower price restores equilibriumwine market with adverse selection: lower
price drives out better vintages, leaving even worse adverse selection
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Life Insurance, I
Coverage = $200,000 for 43 year-old male
NTUC IncomeSingapore
Pacific CenturyHong Kong
Group policy $240 $212
Individual (non-smoker)
$1849 $466
Individual (smoker) $1849 $1120
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Life Insurance, IIgroup policy avoids adverse selectionindividual policy attracts adverse selection
no maximum policy coveragemedical examination required
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Appraisalcharacteristic is objectively verifiablepotential gain covers appraisal cost
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• less informed party indirectly elicits other party’s characteristic through structured choice
• better informed party must be differentially sensitive to the choice
Screening
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Who’s the real mother?Solomon: “Divide the living child into two, and give half to the one, and half to the other.” Woman whose son was alive: “give her the living child, and by no means slay it.” Other woman: “It shall be neither mine nor yours; divide it.”
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Indirect Segment Discriminationrestricted vis-a-vis unrestricted air faresseparate cable channels vis-à-vis bundlecents-off coupons
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Multiple Asymmetriesscreening mechanisms may conflictexample -- auto insurance policy: higher
deductible screens out bad drivers screens out more risk-averse
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Auction auctions to sell: seller doesn’t know buyers’
valuations auctions to buy: buyer doesn’t know sellers’
costs use competitive pressure to force bidders to
reveal their information
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Auction Methodsopen/sealed biddingdiscriminatory/non-discriminatory pricing reserve price
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Winner’s CurseIn auction to buy: winning bidder over-
estimates the true valueIn auction to sell: winning bidder under-
estimates the true costMore severe where
more bidderstrue value/cost more uncertainsealed-bid auction
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• better informed party communicates characteristic through signal
• cost of signal differs according to characteristic self-selection signal is credible
Signaling
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Signaling: Examplesauto manufacturers – extended warrantyIntuit – money-back guarantee on QuickenU.S. publicly-listed companies -- dividends
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Advertising as a signaladvertising expenditure must be sunkbuyers must be able to detect poor qualityinformation about poor quality must quickly
spread and cut into seller’s future business
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Contingent ContractPayment is contingent on realized characteristic:
international trade -- buyback (supplier of technology must buy future product)
mergers and acquisitions – payment in shares
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Contingent FeeLawyer has better information about likelihood of success at trial contingent fee time-based fee