ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Hidden actions and moral hazard – Medical care, doctor visits. – Employment – shirking – Insurance: risky driving, car rental.

Detailed explanation-2: -A buyer and a seller can exchange one unit of an indivisible good. While producing the good, the seller can exert unobservable effort (hidden action). Then the buyer realizes whether his or her valuation is high or low, which stochastically depends upon the seller’s effort level (hidden information).

Detailed explanation-3: -For example, if a homeowner wanted to sell their house, they would have more information about the house than the buyer. They might know some floorboards are creaky, the home gets too cold in winter, or that the neighbors are too loud; information that the buyer would not know until after they purchased the house.

Detailed explanation-4: -Information asymmetry is an imbalance between two negotiating parties in their knowledge of relevant factors and details. Typically, that imbalance means that the side with more information enjoys a competitive advantage over the other party.