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Information Theory 1

Information Theory 1

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Published by Sunny Goyal

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Published by: Sunny Goyal on Jan 22, 2012
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01/22/2012

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Information theor
 Asymmetricinformation and itseffect on marketoutcomes
 
I
nformation asymmetry 
I
nformationasymmetrydeals withthestudyofdecisionsintransactionswhereoneparthasmoreorbetterinformationthantheother.Thiscreatesanimbalanceopowerintransactionswhichcansometimescausethetransactionstogoawry,akindofmarketfailureintheworstcase.
 
The market for lemons
 Akerlof1970 The Market for Lemons: Quality,Uncertainty and the Market Mechanism
 Akerlofinvestigates the effect of asymmetricinformation on the market equilibrium, based on theexample of the used cars market.
Assu
mption
s:
 ±
Used cars can either be of a good quality (Plum), or they can be faulty (Lemon).
 ±
The seller knows the level of quality of his own car
 ±
Potential buyers do not know the level of quality andcannot observe it
a
s
 ymmetric information
http://sylvain.barde.free.fr/Teaching/Micro%200910/Week_12_
I
nformation_theory.ppt

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