Microeconomics: Information Asymmetry (Essay Sample)
This is Microeconomics assignment , 250 words
Under asymmetric information, however, the regulator only knows that a firm could be one of two types but does not know which type it is. Construct and explain the constraints that the regulator must consider under asymmetric information. Compare the constraints with the complete information case and explain intuitively. Using the constraints, identify the volume of ‘information rent’, if any. Give a roadmap how to solve the problem (no need to solve, you need to explain the steps).
Do not need sources. use ur own words to write.please use more definition to answer.
Dateline 7 am
Information asymmetry exists when parting undertaking a transaction are limited in their cognitive ability. In some instances one party would be having more information than the other leading to adverse selection, or one would be having information that the other party does not have leading to moral hazard behaviour. This makes information asymmetry a component of bounded rationality according to institutional economists.
In the case a regulator does not know which firm type he is dealing with, then the firm has information that is not known to the regulator which leads to increased risk. This is because the regulator be be lied to by the firm when they take advantage of opportunism. The firm may thus present information wrongly. For instance it may be a company but since the regulator does not know, they may decide to present it as a partnership which will reduce their legal obligation
If there was complete information, the regulator and the firm would be both at part. This would reduce risks and uncertainty, and the possibility of opportunistic behaviour. The firm will be making all its legal obligations
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