BUS 530 Module 4 Case

Module 4 - Home

ASYMMETRIC INFORMATION AND MARKET OUTCOMES

Modular Learning Outcomes

Upon successful completion of this module, the student will be able to satisfy the following outcomes:

· Case

· Define and explain asymmetric information, adverse selection and moral hazard in the case where consumers have less information than sellers.

· Analyze the market responses to asymmetric information, adverse selection and moral hazard problems due to information asymmetries.

· Explain how ‘market signaling’ and "market screening" can help agents make better economic decisions when asymmetric information exists.

· SLP

· Explain how the principal-agent problem can be reduced by the appropriate choice of a managerial compensation package.

· Discussion

· Explain how to remove or at least moderate the problems associated with asymmetric information, adverse selection and moral hazard.

Module Overview

Module 4 concludes BUS530 with an assessment of the new developments in managerial economics:

· Asymmetric information refers to market situations in which one party in a transaction has more information than the other party.

· Adverse selection is a situation in which asymmetric information causes higher-risk customers to be more likely to purchase or sellers to be more likely to supply low-quality goods.

· Moral hazard is a situation that occurs when, as a result of having insurance, an individual becomes more likely to engage in risky behavior. 

· The lemon problem applies this analytical framework to the market for used cars.

· The principal-agent problem applies the same analytical framework to the relationship between the CEO of a company (the agent) and the stockholders (the principal).  Furthermore, Module 4 introduces the students to three special markets: a) the market for used cars, b) the insurance market, and c) the credit market.

· Finally, Module 4 introduces the students to the use of data and statistical analysis to support managerial decisions.

· Module 4 - Background

· ASYMMETRIC INFORMATION AND MARKET OUTCOMES

· Case Assignment Readings

· Required Reading

· Economics Online. (n.d.). Information Failure [Video file]. Retrieved from http://www.economicsonline.co.uk/Market_failures/Information_failure.html

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· Smith, P. (2013, Aug. 3). Econ in HD: Moral Hazard and Adverse Selection [Video file]. Retrieved from  https://www.youtube.com/watch?v=XH70zIJP5cM

· Thoma, M. (2013. Explainer: What is “moral hazard” [Video file]? Retrieved from http://www.cbsnews.com/news/explainer-moral-hazard/

· Optional Reading

· Tomlinson, S. (n.d.). Understanding Asymmetric Information as an Economic Problem. Retrieved from  http://college.cengage.com/economics/0538797274_mceachern/student/transcripts/8447.pdf

· Webpedia. (n.d.).Assymetric Information. Retrieved from  http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=asymmetric+information

· Tomlinson, S. (n.d.). Understanding Moral Hazards in Markets. Retrieved from http://college.cengage.com/economics/0538797274_mceachern/student/transcripts/8448.pdf

· Citizendiu. Moral Hazard. Retrieved from  http://en.citizendium.org/wiki/Moral_hazard

· Economicshelp. (n.d.). Asymmetric Information Problem. Retrieved from http://www.economicshelp.org/blog/glossary/asymmetric-information/

· Links to the Used Car Problem 

· Required Reading  

· CFPEcon101. (2010, Jan. 11). Economics 101: Moral Hazard [Video file]. Retrieved from https://www.youtube.com/watch?v=_SdtoKeFTi0  

· Links to the Lemon Problem 

· Required Reading 

· Macroman9. (2011, April 27). Lemons Problem Econ11 [Video file]. Retrieved from https://www.youtube.com/watch?v=yGAkeWx5u-c

· tatulln84. (2010, April 6). Adverse Selection and Insurance [Video file]. Retrieved from https://www.youtube.com/watch?v=igqbCTFSFVM

· Optional Reading

· Cavallaro, M. (n.d.) How To Avoid Buying A “Lemon” Product. Retrieved from http://www.investopedia.com/articles/pf/11/solutions-to-lemon-problem.asp

· openlectures sg. (2013, Feb. 9). Principal Agent Problem [Video File]. Retrieved from http://www.youtube.com/watch?v=NfigWaPhAqo

· SLP Assignment Readings

· Required Reading 

· Worstall, T. (2013, March 1). Solving The Principal Agent Problem: Apple Insists That Executives Must Hold Company Stock. Forbes. Retrived from http://www.forbes.com/sites/timworstall/2013/03/01/solving-the-principal-agent-problem-apple-insists-that-executives-must-hold-company-stock/

· Philips, J. (2012, Dec. 28).

· Roy, M. (2013, Sept. 26 ). Agency Theory [Video file]. Retrieved from https://www.youtube.com/watch?v=GJ7y2XaSUCc

· Optional Reading

· openlectures sg. (2013, Feb. 9). Principal Agent Problem [Video file]. Retrieved from https://www.youtube.com/watch?v=NfigWaPhAqo

· Worstall, T. (2014, July 7). Soaring Inequality And CEO Pay Are Not Caused By The Principal/Agent Problem. Forbes. Retrieved from  http://www.forbes.com/sites/timworstall/2014/07/20/soaring-inequality-and-ceo-pay-are-not-caused-by-the-principalagent-problem/

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