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? 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 a 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 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 Why do you look forward to a Big Mac when traveling even though you would never consider buying one at home a 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 Baseball 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