APPLIED ECONOMICS

Assignment submitted to
Prof. Dhaval Pandya

Chapter :
MARKETS WITH ASYMMETRIC INFORMATION
a PRESENTATION BY a
 Roshan Christian
2 Pinkesh Mehta
3 Jigar Purohit
4 Ragnesh Rathod
5 Chetan Master

Semester-
MHRD (Evening)

Department of Research Methodology & Interdisciplinary Studies in Social Science
EER NARMAD SOUTH GUJARAT UNIERSITY
 Asymmetric Information
ÊSome parties know more than others 

{ Seller knows more than the buyer

è - about the quality of the product

{ Employees know more than the employer

è - about their own efficiency and skills

{ Managers know more than the owners

è - about productivity
investment opportunities
competitive position
 - ality ncertainty and
Market for ¶LEMONS·

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    ! 
  
Example Market of sed cars

 "# """
Adverse Selection
{ It is a form of Market Failure resulting when
products of different qualities are sold at a same
price because of asymmetric information
so that too
much of the low-quality and too little of high-quality
products are sold

Examples 
{ ) The market for insurance
{ 2) The market for Credit
Importance of Reputation & Standardization

Asymmetric information is also present in many other markets.

Here are some examples.

ü RETAIL STORES
ü RESTAURANTS
ü ROOFERS
PLUMBERS
ELECTRICIANS
ü DEALER OF RARE STAMPS
COINS AND PAINTINGS
Market Signaling
Definition 
Market Signaling is a process by which the sellers send
signals to buyers conveying information about the
product quality

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A simple model of Job Market Signaling

GROUPa
GROUPa
Low-Quality workers High-Quality workers
Marginal productivity =  Marginal productivity = 2

Workers get employment with competitive firms

TARGET : Annual sales of Rs.1,00,000/-
Minimum 10 years from each worker

Expected Revenue For 10 Years

Rs. 10,00,000/- Rs. 20,00,000/-

A simple model of Job Market Signaling
GROUPa
GROUPa
Low-Quality workers High-Quality workers
Marginal productivity =  Marginal productivity = 2

Wages to be paid
Rs. 1,00,000/- Rs. 2,00,000/-

Wages paid
Rs. 1,50,000/- Rs. 1,50,000/-
(Rs. 50,000 more) (Rs. 50,000 less)
hat is the reason ???
Asymmetric Information that all the workers are of medium quality
G arantees and Warranties
{ Producers of high-quality products have to convey the
information regarding the quality of their product to
make the customers aware
{ Effective signalling
Moral Hazard

{ hen a party is fully insured and cannot be

accurately monitored by insurance company
having limited information
the insured party
may take an action that increases the
probability of accident or injury to him
Example  Moral Hazard
The Principal ² Agent Problem
{ Principal Individual who employs one or more agents to
achieve an objective

{ Agent Individual employed by a principal to achieve the

principal·s objective

{ PrincipalaAgent Problem The problem arising when agents

(e g managers of the firm) pursue
their own goals rather than the
goals of the principals (e g owners
of the firm)
The Principal ² Agent Problem
{ PrincipalaAgent problem in Private Enterprises
{ PrincipalaAgent problem in P blic Enterprises

{ Sol tion
Incentives in the Principal-Agent Framework
Managerial Incentives in an Integrated Firm
Asymmetric Information and Incentive Design in the Integrated Firm
 Central Management
 Reward Structure
 Asymmetric information in Labor Markets
a Efficiency Wage Theory

Ass mption

The model assumes perfectly competitive market in which all

workers are equally productive and earn the same wage Once
hired
workers can either work productively or shirk But
because information about their performance is limited
workers
may not get fired for shirking

Shirk = Avoid
Reject

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Thanks for Suggestions / Comments