Asymmetric information makes it hard for investors to sell securities. Banks, meaning both investment and commercial, specialize in reducing asymmetric information. What methods do they have for reducing information asymmetries? Be sure to specify if the methods are designed to reduce the problems of adverse selection or moral hazard.

Asymmetric information makes it hard for investors to sell securities. Banks, meaning both investment and commercial, specialize in reducing asymmetric information. What methods do they have for reducing information asymmetries? Be sure to specify if the methods are designed to reduce the problems of adverse selection or moral hazard.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter20: The Problem Of Adverse Selection Moral Hazard

Section: Chapter Questions

Problem 7MC

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Similar questions

Describe the two problems arising from asymmetric information, namely: Adverse selection; and Moral hazard.
Discuss the implications for firms of asymmetric information when potential investors can not distinguish ‘good’ from ‘bad’ firms.
How could a company minimize asymmetric information if they were interested in pricing their stock fairly?
The text points out that asymmetric information can have deleterious effects on market outcomes. a. Explain how asymmetric information about a hidden action or a hidden characteristic can lead to moral hazard or adverse selection. b. Discuss a few tactics that managers can use to overcome these problems.
After a loan has been made to a borrower, what can financial intermediaries do to reduce moral hazard?
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Pick a good and explain how asymmetric or imperfect information could impact the price and confidence of a buyer or seller.
Company X sells a high-quality product. Its problem is that consumers cannot differentiate company X’s product from competing, very low-quality products. What is this particular type of information asymmetry problem called? What is one way that company X can solve this problem (without relying on government policy)?
Give an example, real or imaginary, of an adverse selection problem. Your example must clearly point out: what information is private/asymmetric (is it an attribute or an action?) which party has the private information when does the information asymmetry arise (before or after the contract/transaction?) what is the likely outcome and in which way it can be inefficient
Which is not an example of asymmetric information? Group of answer choices A customer not knowing which insurance plan is best A client making a purchase of a used private airplane of unknown condition A mail carrier making her deliveries An insurer not having the full information about a client’s drug use A tree service recommending needless pruning on fruit trees is an example of: Group of answer choices adverse selection. mutually beneficial trades. moral hazard. a trade fallacy.
The adverse selection problem in lending occurs: When information costs are low. When more risky borrowers than safe borrowers seek a loan. When a borrower engages in riskier activity after a loan is made. Bankers refuse to make a loan to a lender. The moral hazard problem in lending occurs: When information costs are low. When more risky borrowers than safe borrowers seek a loan. When a borrower engages in riskier activity after a loan is made. Bankers refuse to make a loan to a lender.
Which of the following is the least likely example of asymmetric information? a. King Solomon and two women who claim to be the mother of a baby b. a job applicant and a prospective employer c. an auto mechanic and a transient customer d. a retailer of used books and prospective customers