Asymmetric Information

1
Asymmetric Information

• Asymmetric Information is when parties are not
  equally informed.
• For instance, with the sale of a good, the seller
  may know the value better than the buyer.
• In the classroom experiment, the seller
  (computer) knows how much it is worth, the buyer
  (student) does not.
• The seller is more willing to sell the car if the
  value is lower than if the value is higher.
• Thus, for a given price, a buyer is more likely
  to attract sellers with lower quality goods.

2
Buyer-Seller Example

• Value for the seller has an equal chance of being
  any number between 0 and 100.
• What is the average value?
• 50.
• If the buyer offers a price of 50, for which
  values will the seller sell?
• Values 0 to 50.
• What is the average of these values? What is 3/2
  times the average of these values?
• Average 25. This times 3/2 is 37.5.

3
General Solution.

• If the buyer offers a price of p, for which
  values will the seller sell.
• 0 to p.
• What is 3/2 times the average of these values?
• Average is p/2 . This times 3/2 is (3/4) p.
• On average, how much will the buyer make if he
  values the object 3/2 times the seller. What
  should the buyer do?
• 3/2 p/2 p3/4 p p -p/4. Set p0.

4
Applications

• Akelof recognized this problem in that used cars
  tend to be lemons.
• That is the seller knows more about the condition
  than the buyer.
• This is one reason why as soon as one leaves the
  dealer with a new car it has a significant drop
  in value.