In our previous Learning Path, we learned the basics about Information economics. We saw what adverse selection and moral hazard are, using as en example the healthcare insurance market. Of course, insurance companies have ways of getting around adverse selection and moral hazard to a certain extent. But an insurance company is never going to be able to segment their policies fully: when was the last time you were asked about your driving style when subscribing to a dental plan? And most sane people won’t risk their life just because their healthcare is covered (in fact, most countries with a free, national health service have longer life expectancies and shorter hospital stays than countries that don’t), but how many of us park our friend’s car more carefully because we are not insured in it?
In this LP we’ll cover the implications of asymmetrical information, looking at the most important examples. We’ll start by looking at adverse selection, then we’ll learn more about moral hazard.
Adverse selection, ex-ante asymmetric information;
The Market for Lemons, a paper describing adverse selection and moral hazard;
Screening, which employers use to beat adverse selection;
Signalling, which good employees-to-be use to avoid adverse selection.
Moral hazard, ex-post asymmetric information;
Credit Rationing in Markets with Imperfect Information, a paper explaining how moral hazard affect credit markets;
Incentives, used by employers to avoid moral hazard.