Ec440 Week 7

Front 1

Adverse selection

Back 1

Opportunism characterized by an informal person benefiting from trading with a less informed person who does not know about an unobserved characteristic of the informed person (e.g. health)

Front 2

Moral hazard

Back 2

Opportunism characterized by an informed person taking advantage of a less informed person through an unobserved action (e.g. worker’s effort)

Front 3

Ex-ante moral hazard

Back 3

Problem related to unobservable actions/efforts undertaken by agent before “returns” are realized.e.g. financial firms taking risky investments, assuming that the state will bail them out if things go wrong

Front 4

Ex-post moral hazard

Back 4

Problem related to unobservable actions/effort undertaken by agent after project returns are realized e.g. false claim

Front 5

Asymmetric information

Back 5

Asymmetric information about quality can drive high quality goods out of the market

Front 6

Screening

Back 6

Action taken by an uninformed person to determine information possessed by informed people

Front 7

Signalling

Back 7

Action taken by informed person to send information to a less-informed person