Discussion Preparation:
This weeks discussion will focus on asymmetric information, moral hazard, and adverse selection. Sometimes there can be confusion as to these terms meanings and connections. To prepare for the discussion, watch the following videos:
Moral Hazard:
https://mru.org/courses/principles-economics-microeconomics/moral-hazard-adverse-selection
Asymmetric Information and Used Cars:
https://mru.org/courses/principles-economics-microeconomics/adverse-selection-asymmetric-information-definition
Additionally, review the following:
George Akerlof shook much of the economic world and won the Nobel Prize for asking: What if everybody who is a party to an economic transaction doesnt have the same information?
You may remember one of the basic assumptions of competitive markets is that buyers and sellers have perfect and exactly the same information. There is a similar assumption for imperfectly competitive markets that information can be obtained at little or no cost. For a huge number of markets, neither of these is even close to true. When information is not the same on both sides of the marketor when it is very hard or costly for the unknowing party to gain parity of informationwe are likely to find market failure called adverse selection or moral hazard.
An underlying cause of uncertainty in the Week 6, 7, and 8 Discussions is the principal-agent problem. This problem is central to much of the analysis you will do on the final case study.
This weeks discussion is also about how a seller (an accountant) can signal a buyer (a company) to reveal hidden information.
Signaling:
https://mru.org/courses/principles-economics-microeconomics/signaling-economics
Instructions:
Consider the following statement:
Many corporations require all staff accountants to hold not only a degree in accounting but also to have a CPA license. There is a substantially higher cost to hiring CPAs.
In your discussion post, address the following:
1. Speculate on why corporations do not lower their explicit payroll cost by hiring accountants without a CPA.
2. Consider how asymmetric information, moral hazard, and adverse selection may impact the perception of risk.
Please use the textbook source provided and links provided as the only sources. Only need 2 sources which are provided here.
