ABSTRACT
When you are finished with this chapter you should understand:
How models of asymmetric information can be used to describe situations where an economic agent has some information which other economic agents do not have
The difference between adverse selection problems and moral hazard problems
How contracts and warranties can be used to mitigate adverse selection or moral hazard problems
That consumers will use price as a signal of quality when they cannot directly observe the quality of a good
How a producer’s strategy regarding the optimal provision of quality depends upon how quickly consumers learned about quality, the number of informed consumers, and the ease with which the producer can vary the provision of quality
That when a producer’s reputation can affect a consumer’s perception of quality, higher prices can serve as compensation to the producer for provision of higher quality
