ChapterChapter 35 35

Asymmetric Information

Common knowledge and

private information.

The latter leads to

Asymmetric information, or

Asymmetry of information.

Quality

Density

Akerlof model: the market for lemons.

Adverse selection as a hidden information problem.

Moral hazard as a hidden action problem.

Signaling

Two roles of education:To raise and to distinguish

Productivities

Spence model

$ C(Y) for L

wage system

C(Y) for H

Y* Y

Best Choice of L, and of H

Graph to show separating equilibria

and pooling equilibria.