平狄克微观经济学Markets-with-Asymmetric-Information.ppt

,Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,Chapter 17,*,2005 Pearson Education,Inc.,Chapter 17,Markets with Asymmetric Information,Topics to be Discussed,Quality Uncertainty and the Market for Lemons,Market Signaling,Moral Hazard,The Principal-Agent Problem,Managerial Incentives in an Integrated Firm,Asymmetric Information in Labor Markets:Efficiency Wage Theory,2,Chapter 17,Introduction,We can see what happens when some parties know more than others,asymmetric information,Frequently a seller or producer knows more about the quality of the product than the buyer does,Managers know more about costs,competitive position and investment opportunities than firm owners,3,Chapter 17,Quality Uncertainty and the Market for Lemons,Asymmetric information is a situation in which a buyer and a seller possess different information about a transaction,The lack of complete information when purchasing a used car increases the risk of the purchase and lowers the value of the car,Markets for insurance,financial credit and employment are also characterized by asymmetric information about product quality,4,Chapter 17,The Market for Used Cars,High quality market,S,H,is supply and D,H,is demand for high quality,Low quality market,S,L,is supply and D,L,is demand for low quality,S,H,is higher than S,L,because owners of high quality cars need more money to sell them,D,H,is higher than D,L,because people are willing to pay more for higher quality,6,Chapter 17,The Lemons Problem,P,H,P,L,Q,H,Q,L,S,H,S,L,D,H,D,L,5,000,50,000,50,000,10,000,D,L,Market price for high quality cars is$10,000.,Market price for low quality cars is$5000.,50,000 of each type are sold.,7,Chapter 17,The Market for Used Cars,Sellers know more about the quality of the used car than the buyer,Initially buyers may think the odds are 50/50 that the car is high quality,Buyers will view all cars as medium quality with demand D,M,However,fewer high quality cars(25,000)and more low quality cars(75,000)will now be sold,Perceived demand will now shift,8,Chapter 17,The Market for Used Cars,With asymmetric information:,Low quality goods drive high quality goods out of the market-the lemons problem,The market has failed to produce mutually beneficial trade,Too many low and too few high quality cars are on the market,Adverse selection occurs;the only cars on the market will be low quality cars,10,Chapter 17,Market for Insurance,Older individuals have difficulty purchasing health insurance at almost any price,They know more about their health than the insurance company,Because unhealthy people are more likely to want insurance,the proportion of unhealthy people in the pool of insured people rises,Price of insurance rises so healthy people with low risk drop out proportion of unhealthy people rises,increasing price more,11,Chapter 17,Market for Insurance,A possible solution to this problem is to pool risks,Health insurance government takes on role as with Medicare program,Problem of adverse selection is eliminated,Insurance companies will try to avoid risk by offering group health insurance policies at places of employment and thereby spreading risk over a large pool,13,Chapter 17,Importance of Reputation and Standardization,Asymmetric Information and Daily Market Decisions,Retail sales return policies,Antiques,art,rare coins real or counterfeit,Home repairs unique information,Restaurants kitchen status,15,Chapter 17,Implications of Asymmetric Information,How can these producers provide high-quality goods when asymmetric information will drive out high-quality goods through adverse selection?,Reputation,You hear about restaurants or stores that have good or bad service and quality,Standardization,Chains that keep production the same everywhere McDonalds,Olive Garden,16,Chapter 17,Lemons in Major League Baseball,Rules in baseball changed so that after 6 years a player could either re-sign with their team or become a free agent and try to sign with another team,Free agents create a secondhand market in baseball players,If a lemons market exists,free agents should be less reliable(disabled)than renewed contracts,18,Chapter 17,Player Disability,Days on Disabled List per Season,Pre Contract,Post Contract,Percent Change,All Players,4.73,12.55,165.4,Renewed Players,4.76,9.68,103.4,Free Agents,4.67,17.23,268.9,19,Chapter 17,Lemons in Major League Baseball,Findings,Days on the disabled list increase for both free agents and renewed players,Free agents have a significantly higher disability rate than renewed players,This indicates a lemons market,20,Chapter 17,Market Signaling,The process of sellers using signals to convey information to buyers about the products quality,For example,how do workers let employers know they are productive so they will be hired?,21,Chapter 17,Market Signaling,Weak signal could be dressing well,Is weak because even unproductive employees can dress well,Strong Signal,To be effective,a signal must be easier for high quality sellers to give than low quality sellers,Example,Highly productive workers signal with educational attainment level,22,Chapter 17,Model of Job Market Signaling,Competitive Product Market,P=$10,000,Employees average 10 years of employment,Group I Revenue=$100,000,(10,000/yr.x 10 years),Group II Revenue=$200,000,(20,000/yr.X 10 years),24,Chapter 17,Model of Job Market Signaling,With Complete Information,w=MRP,Group I wage=$10,000/yr.,Group II wage=$20,000/yr.,With Asymmetric Information,w=average productivity,Group I&II wage=$15,000/yr.,25,Chapter 17,Model of Job Market Signaling,If use signaling with education,y=education index(years of higher education),Assume all benefits encompassed in years of education,C=cost of attaining educational level y,Tuition,books,opportunity cost,etc.,Group I,C,I,(y)=$40,000y,Group II,C,II,(y)=$20,000y,26,Chapter 17,Model of Job Market Signaling,Assume education does not increase productivity with only value as a signal,Find equilibrium where people obtain different levels of education and firms look at education as a signal,Decision Rule:,y*signals G,II,and wage=$20,000,Below y*signals G,I,and wage=$10,000,28,Chapter 17,Model of Job Market Signaling,Decision Rule:,Anyone with y*years of education or more is a Group II person offered$20,000,Below y*signals Group I and offered a wage of$10,000,y*is arbitrary,but firms must identify people correctly,29,Chapter 17,Model of Job Market Signaling,There is no reason to obtain an education level between 0 and y*because earnings are the same,Similarly,there is no incentive to obtain more than y*level of education because once hit the y*level of pay,there are no more increases in wages,31,Chapter 17,Model of Job Market Signaling,How much education to choose is a benefit cost analysis,Goal:obtain the education level y*if the benefit(increase in earnings)is at least as large as the cost of the education,Group I:,$100,000 2.5,Group II:,$100,000$20,000y*,y*Q,f,B=.3Q,f,+.2(Q-Q,f,),If Q,Q,f,B=.3Q,f,-.5(Q,f,-Q),71,Chapter 17,Managerial Incentives in an Integrated Firm,Assume true production limit is Q*=20,000,Line for 20,000 is continued for outputs beyond 20,000 to illustrate the bonus scheme but dashed to signify the infeasibility of such production,Bonus is maximized when firm produces at its limit of 20,000;the bonus is then$6000,72,Chapter 17,Incentive Design in an Integrated Firm,Output,(units per year),2,000,4,000,6,000,10,000,0,10,000,20,000,30,000,40,000,Bonus,($per,year),8,000,If,Q,f,=,30,000,bonus is$4,000,the maximum,amount possible.,Q,f,=,30,000,Q,f,=,10,000,If,Q,f,=,10,000,bonus is$5,000.,Q,f,=,20,000,If,Q,f,=Q*=,20,000,bonus is$6,000.,73,Chapter 17,Efficiency Wage Theory,In a competitive labor market,all who wish to work will find jobs for a wage equal to their marginal product,However,most countries economies experience unemployment,74,Chapter 17,Efficiency Wage Theory,The efficiency wage theory can explain the presence of unemployment and wage discrimination,In developing countries,productivity depends on the wage rate for nutritional reasons,75,Chapter 17,Efficiency Wage Theory,The shirking model can be better used to explain unemployment and wage discrimination in the United States,Assumes perfectly competitive markets,However,workers can work or shirk,Since performance information is limited,workers may not get fired,76,Chapter 17,Efficiency Wage Theory,If workers are paid market clearing wage,w*,they have incentive to shirk,If they get caught and fired,they can immediately get a job elsewhere for same wage,Firms have to pay a higher wage to make loss higher from shirking,Wage at which no shirking occurs is the,efficiency wage,77,Chapter 17,Efficiency Wage Theory,All firms will offer more than market clearing wage,w*,say,w,e,(efficiency wage),In this case,workers fired for shirking face unemployment because demand for labor is less than market clearing quantity,78,Chapter 17,Without shirking,the market wage,is,w,*,and full-employment exists at,L,*,Demand for,Labor,w*,L*,Unemployment in a Shirking Model,Quantity of,Labor,Wage,S,L,No-Shirking,Constraint,The no-shirking,constraint gives,the wage necessary,to keep workers,from shirking.,w,e,L,e,At the equilibrium wage,W,e,the,firm hires,L,e,workers,creating unemployment of,L*-L,e,.,79,Chapter 17,Efficiency Wages at Ford Motor Company,Labor turnover at Ford,1913:380%,1914:1000%,Average pay=$2-$3,Ford increased pay to$5,80,Chapter 17,Efficiency Wages at Ford Motor Company,Results,Productivity increased 51%,Absenteeism was halved,Profitability rose from$30 million in 1914 to$60 million in 1916,81,Chapter 17,Chapter 18,Externalities and Public Goods,Topics to be Discussed,Externalities,Ways of Correcting Market Failure,Externalities and Property Rights,Common Property Resources,Public Goods,Private Preferences for Public Goods,83,Chapter 17,Externalities,Externalities arise between producers,between consumers,or between producers and consumers,Externalities are the effects of production and consumption activities not directly reflected in the market,They can be negative or positive,84,Chapter 17,Externalities,Negative,Action by one party imposes a cost on another party,Plant dumps waste in a river,affecting those downstream,The firm has no incentive to account for the external costs that it imposes on those downstream,85,Chapter 17,Externalities,Positive,Action by one party benefits another party,Homeowner plants a beautiful garden where all the neighbors benefit from it,Homeowner did not take their benefits into account when deciding to plant,86,Chapter 17,Negative Externalities and Inefficiency,Scenario plant dumping waste,Marginal External Cost(MEC)is the increase in cost imposed on fishermen downstream for each level of production,Marginal Social Cost(MSC)is MC plus MEC,We can show the competitive market firm decision and the market demand and supply curves,87,Chapter 17,Negative Externalities and Inefficiency,Assume the firm has a fixed proportions production function and cannot alter its input combinations,The only way to reduce waste is to reduce output,Price of steel and quantity of steel initially produced given by the intersection of supply and demand,88,Chapter 17,Negative Externalities and Inefficiency,The MC curve for the firm is the marginal cost of production,Firm maximizes profit by producing where MC equals price in a competitive firm,As firm output increases,external costs on fishermen also increase,measured by the marginal external cost curve,From a social point of view,the firm produces too much output,89,Chapter 17,External Costs,MC,S=MC,I,P,1,q,1,P,1,Q,1,MSC,MSC,I,Firm output,Price,Industry output,Price,MEC,MEC,I,q*,P*,Q*,D,Firm will produce q1 at P1.,There is MEC of production from the waste released.The MSC is true cost of production.,The profit maximizing firm,produces at q,1,while the,efficient output level is q*.,90,Chapter 17,External Costs,Aggregate,social cost of,negative,externality,By not producing at the efficient level,there is a social cost on society.,MC,S=MC,I,D,P,1,P,1,q,1,Q,1,MSC,MSC,I,Firm output,Price,Industry output,Price,MEC,MEC,I,q*,P*,Q*,91,Chapter 17,External Cost,Negative externalities encourage inefficient firms to remain in the industry and create excessive production in the long run,92,Chapter 17,Positive Externalities and Inefficiency,Externalities can also result in too little production,as can be shown in an example of home repair and landscaping,Repairs generate external benefits to the neighbors,Shown by the Marginal External Benefit curve(MEB),Marginal Social Benefit(MSB)curve adds MEB+D,93,Chapter 17,MC,P,1,External Benefits,Repair Level,Value,D,q,1,MSB,MEB,When there are positive,externalities(the benefits,of repairs to neighbors),marginal social benefits,(MSB)are higher than,marginal benefits(,D).,q,*,P*,A self-interested home owner,invests,q,1,in repairs.The,efficient level of repairs,q*,is higher.The higher price,P,1,discourages repair.,94,Chapter 17,Ways of Correcting Market Failure,Assumption:The market failure is pollution,Output decision and emissions decision are independent,Firm has chosen its profit-maximizing output level,MSC is marginal social cost of emissions,Equivalent to MEC from before,Upward sloping because of substantially increasing harm as pollution increases,95,Chapter 17,Ways of Correcting Market Failure,MCA is marginal cost of abating emissions,Additional cost to firm of controlling pollution,Downward sloping because when emissions are high,there is little cost to controlling them,Large reductions require costly changes in production process,96,Chapter 17,Ways of Correcting Market Failure,If the firm does not consider abatement,their profit maximizing level is 26 units of emissions,Level where MCA is zero,The socially efficient level of emissions is 12 where the MSC equals the MCA,97,Chapter 17,The Efficient Level of Emissions,2,4,6,Dollars/Unit,of Emissions,Level of Emissions,0,2,4,6,8,10,12,14,16,18,20,22,24,26,MSC,MCA,E*,The efficient level of,emissions is where,MCA=MSC.,At,E,o,the marginal,cost of abating emissions,is greater than the,marginal social cost.,E,0,At,E,1,the marginal,social cost is greater,than the marginal benefit.,E,1,98,Chapter 17,Ways of Correcting Market Failure,Firms can be encouraged to reduce emissions to the efficient level in three ways:,Emissions standards,Emissions fees,Transferable emissions permits,99,Chapter 17,Ways of Correcting Market Failure,Options for Reducing Emissions to E*,Emissions Standard,Set a legal limit on emissions at E*(12),Enforced by monetary and criminal penalties,Increases the cost of production and the threshold price to enter the industry,Emissions Fee,Charge levied on each unit of emission,100,Chapter 17,Standards and Fees,Level of Emissions,Dollars/Unit,of Emissions,MSC,MCA,3,12,E*,Standard,Fee,101,Chapter 17,Total,Abatement Cost,Cost is less than the,fee if emissions were,not reduced.,Standards and Fees,Level of Em