Weeks 7 & 8

Week 7 discussion

Asymmetric information and/or imperfect information can cause two forms of market failure: 1) adverse selection and 2) moral hazard. Asymmetric information is where one party in the transaction has more information than the other party in the transaction. Imperfect information is a situation in which neither party has perfect information about the good/service being exchanged in a transaction. Such goods and services are sometime referred to as "experience goods."

In the late 1990s, car leasing was very popular in the United States. A customer would lease a car from the manufacturer for a set term, usually two years, and then have the option of keeping the car. If the customer decided to keep the car, the customer would pay a price to the manufacturer, the “residual value,” computed as 60% of the new car price. The manufacturer would then sell the returned cars at auction. In 1999, the manufacturer lost an average of $480 on each returned car. (The auction price was, on average, $480 less than the residual value.)

Also see the help provided in the discussion preparation.

Instructions

For your discussion post, address the following within the context of the above scenario:

1. Why was the manufacturer losing money on this program? Was this a problem of adverse selection or moral hazard?

2. What should the manufacturer do to stop losing money? Will rational actors use rules of thumb?

Week 8 discussion

For this discussion, your focus will be on what asymmetric information, moral hazard, and adverse selection have to do with corporate hiring staff accountants.

Also see the help provided in the discussion preparation.

Instructions

Consider the following statement:

Many corporations require all staff accountants to hold not only a degree in accounting but also to have a CPA license. There is a substantial higher cost to hiring CPAs.

In your discussion post, address the following:

1. Speculate on why corporations do not lower their explicit payroll cost by hiring accountants without a CPA. Consider how asymmetric information, moral hazard, and adverse selection may impact the perception of risk.