Implications of Asymmetric Information The market for credit o Asymmetric information creates the potential that only high risk borrowers will seek loans ● Question How can credit histories help make this market more efficient and reduce the cost of credit? Chapter 17 Slide 11
Chapter 17 Slide 11 Implications of Asymmetric Information The Market for Credit ⚫ Asymmetric information creates the potential that only high risk borrowers will seek loans. ⚫ Question ◆How can credit histories help make this market more efficient and reduce the cost of credit?
Implications of Asymmetric Information The Importance of Reputation and Standardization o Asymmetric Information and daily Market Decisions ◆ Retail sales .Antiques, art. rare coins ◆ Home repairs ◆ Restaurants Chapter 17 Slide 12
Chapter 17 Slide 12 Implications of Asymmetric Information The Importance of Reputation and Standardization ⚫ Asymmetric Information and Daily Market Decisions ◆Retail sales ◆Antiques, art, rare coins ◆Home repairs ◆Restaurants
Implications of Asymmetric Information Question o How can these producers provide high quality goods when asymmetric information will drive out high-quality goods through adverse selection ● Answer ◆ Reputation Chapter 17 Slide 13
Chapter 17 Slide 13 Implications of Asymmetric Information Question ⚫ How can these producers provide highquality goods when asymmetric information will drive out high-quality goods through adverse selection. ⚫ Answer ◆Reputation
Implications of Asymmetric Information Question o Why do you look forward to a Big Mac when traveling even though you would never consider buying one at home Holiday Inn once advertised "No Surprises" to address the issue of adverse selection Chapter 17 Slide 14
Chapter 17 Slide 14 Implications of Asymmetric Information Question ⚫ Why do you look forward to a Big Mac when traveling even though you would never consider buying one at home. Holiday Inn once advertised “No Surprises” to address the issue of adverse selection
Lemons in Major League Base ball Asymmetric information and the market for free agents o If a lemons market exists, free agents should be less reliable(disabled) than renewed contracts Chapter 17 Slide 15
Chapter 17 Slide 15 Lemons in Major League Baseball Asymmetric information and the market for free agents ⚫ If a lemons market exists, free agents should be less reliable (disabled) than renewed contracts