Bài giảng Microeconomics - Chapter 12 The Economics of Information

The Economics of Information0What is Chapter 12 about?1I. The Importance of InformationSlide 12 - 22Perfect InformationThe invisible hand theory assumes perfect informationWhat goods and services are availableWhat prices they sell forThe quality of the goods and servicesBut information can be costly or impossible to obtain3Gathering InformationTwo Key cases:Information that is costly to acquireIssue then is what strategies to use to gather information & when do we have enoughRead Consumer Reports, Talk to family and friends, Internet, Direct contactsInformation that is inherently asymmetricSeller may have opportunity & motive not to disclose information (e.g. used car)When information is being purchased, seller inevitably knows more (e.g. MD, lawyer)4Middleman can add Value by certifying qualityConsumers must rely on information from othersSales agents or “middlemen”Provide the service of gathering information Make it available to people who can use itConsumers’ trade off:benefits from search - lower price? costs (time & $) of searchSpecialists enable more total economic surplus as goods go from lower-valued uses to higher- valued uses5II. The Optimal Amount of InformationSlide 12 - 66When do I have “enough” information to decide ?Benefits - having more information is better than having less BUTThe value of additional information tends to decline beyond some pointCosts - Information is often costly to acquireTime cost = opportunity cost of time The marginal cost of gathering additional information increases, if people gather from the cheapest sources first7Fig. 12.1The Optimal Amount of Information8Optimal Amount of InformationAKA the optimal amount of ignoranceSearch can be seen as an investment activity – investing in informationRule: stop collecting information when the marginal expected benefit equals the marginal expected cost But because we do not know, the outcomes of search are always uncertain9Free-Rider ProblemThe invisible hand does not always assure that the optimal amount of information will be available to consumersFree-rider problem:An incentive problem in which too little of a good/service is produced because non-payers cannot be excluded from using itCopy cats can get the benefit of search, but avoid the costs – so who will invest in search ?10Rational SearchAdditional search time is likely to be more worthwhile for expensive items than for cheap onesFor example, hiring an agent to assist when buying a homeWhen opportunity cost of searching increases, we search lessFor example, we pay higher prices11ExpectationsWhen outcomes are uncertain, life is a gambleIssue: the probability & payoff in each outcomeExpected value of a gamblethe sum of the possible payoff outcomes multiplied by their respective probabilitiesFair gambleA gamble whose expected value is zeroBetter-than-fair gambleA gamble whose expected value is positive12Search & Taste for RiskA person is risk neutral:If she accepts any gamble that is fair or betterA person is risk averse:When a fair gamble is refusedSomeone who is willing to pay for insuranceBenefit of further search depends on degree of risk aversion13III. Asymmetric InformationSlide 12 - 1414Asymmetric Information: DefinitionAsymmetric information:buyers and sellers are not equally informed about the characteristics of goods and services for sale in the marketplacethe owner of a used car knows if car is in good condition, but buyers cannot know as much; Patient goes to the doctor because MD knows more about illness15Lemons – why do used cars sell at a discount?The Lemons model: Asymmetric information tends to reduce the average quality of goods offered for sale – (Akerlof)Two kinds of new cars – OK & “lemons” After you buy, find out which – do you then sell?More likely to sell if “lemon” Buyers know that cars on the used car market are more likely to be “lemons” than those not for saleHence, the price buyers will pay falls (i.e., their reservation price falls)16Unloading “Lemons”Potential buyers of used cars cannot have as much information as sellers Prices of used cars will be lower than if there was perfect informationHence, owners of cars that are in good condition have an incentive to keep them rather than sell them for less than they are worthThis causes the average quality of used cars to decline even further17Truth & the incentives to ExaggerateSellers have an incentive to overstate the quality of their productBuyers know thisBuyers have an incentive to understate the amount they are willing to pay for productsSellers know this18CredibilityParties to an exchange will both gain if they can find a way to communicate knowledge truthfullyTry warranties or advertisingBrand names as “quality hostages” Costly-to-fake principleTo communicate information credibly to a potential rival, a signal must be costly or difficult to fakeUniversity attendance as a “signal” of ability19Is price a signal of quality ? Can conspicuous consumption signal the professional competence of the provider?If people with the most ability tend to receive the highest salaries & the more one earns, the more one tends to spend, is it reasonable to hire the lawyer with the best suit ?If people infer a person’s ability from the amount and quality of the goods he or she consumesSocial pressure to conspicuous consumptionMarket equilibrium is inefficientAll providers over-invest in signaling20Sellers BewareIn many markets the seller does not know the exact cost of serving each buyerFor example, the market for fire insuranceFirms will estimate costsStatistical discrimination:The practice of making judgments about the quality of people, goods, or services based on characteristics of the groups to which they belongExample: insurance premiums that vary by postal code, gender 21Adverse Selection & Market FailureAdverse selection - when insurance is purchased disproportionately by those who are most likely to claimExample – the sickly have the most to gain by having medical insuranceIndividual purchase means that insurance is more attractive to those more likely to file claimsForces insurance companies to raise premiumsMakes insurance even less attractive to low-risk (healthy) individualsResult: Market Failure22End of Chapter SlidesConcept Maps meant for student printouts follow.Concept Map slides are also available in pdf format.Slide 11 - 2323What is Chapter 12 about?24I. The Importance of Information25II. The Optimal Amount of Information26III. Asymmetric Information27Summary of Chapter 1228