K.J.

SOMAIYA COLLEGE OF
ARTS AND COMMERCE

MANAGERIAL
ECONOMICS
SYBMS

PROF: SHUBHANGI PATIL

 Asymmetric
Information
&
Moral Hazards
 INTRODCUTION
• Deals with the study of decisions in transactions.
• One party has better information than the other.
• Creates an imbalance of power in transactions.
• Problems are
i. Adverse Selection
ii. Moral Hazards.
 MEANING
• Information that is known to some people but
not to other people.
• Precipitate a difference in the cost of internal
and external finance.
• Classical argument.
 PROBLEMS
Asymmetric
Information

Adverse
Selection

Moral
Hazards
 ADVERSE SELECTION
• Sellers have relevant information that buyers
lack (or vice versa).
• Lenders cannot discriminate price.
• Effect of interest rate.
 MORAL HAZARDS
• One party has more information than another.
• Inappropriate behavior of party that has more
information.
• It is the consequence of asymmetric
information after the transaction occurs.
• Firm prospective.
POSSIBLE SOLUTIONS

 SIGNALING

 SCREENING
 SIGNALING
• Proposed by Michael Spence
• Action taken by an informed person to send
information to a less-informed person.

SCREENING
• Joseph E. Stiglitz pioneered the theory of
screening.
• Action taken by an uninformed person to
determine info possessed by informed people
“LEMON MARKET”
“LEMON MARKET”
EXAMPLES
CONCLUSION
 K
THANK
YOU