Frontiers of
Microeconomics
Chapter 22
Outline
The economics of asymmetric information
Political economics
Behavioral economics
Asymmetric Information
A difference in access to relevant
knowledge is called an information
asymmetry
Examples:
– Hidden action
– Hidden characteristic
Hidden Actions
Agent
– a person who is performing an act for another
person called the principal.
Principal
– a person for whom another person,called the
agent,is performing some act.
Moral hazard
– The tendency of a person who is imperfectly
monitored to engage in dishonest or
otherwise undesirable behavior,
Hidden Characteristics,Adverse
Selection and the Lemons Problem
Adverse selection:
– The tendency for the mix unobserved
attributes to become undesirable from the
standpoint of an uniformed party.
Examples,used car,labor market,health
insurance
Signaling and Screening
Signaling:
– An action taken by an informed party to
reveal private information to an unformed
party.
Examples,advertising,diploma
Screening:
– An action taken by an uninformed party to
induce an informed party to reveal
information.
Examples,used car,car insurance
Asymmetric Information
and Public Policy
Asymmetric information may call for
government action in some cases,but
there are some issues else:
The private market can sometimes deal
with information asymmetries itself.
The government rarely has more
information than the private parties.
The government is itself an imperfect
institution.
Political Economy
Before we embrace an activist government,
we need to consider one more fact,the
government is also an imperfect institution.
The Condorcet paradox
Arrow’s impossibility theorem
The Median voter theorem
Politicians with self-interest motive
The Condorcet Voting Paradox
Voter Type
Type 1 Type 2 Type 3
Percent of electorate 35 45 20
First Choice A B C
Second Choice B C A
Third Choice C A B
The Condorcet Voting Paradox
Condorcet paradox,the failure of majority
rule to produce transitive preferences for
society.
The order on which things are voted can
affect the result.
The narrow lesson
The broad lesson
Arrow’s Impossibility Theorem
Five conditions:
– Completeness
– Unanimity
– Transitivity
– Independence of irrelevant alternatives
– No dictators
Conclusion,no voting system can satisfy all
these conditions,(Arrow’s impossibility
theorem)
Arrow’s Impossibility Theorem
No matter what voting scheme society
adopts for aggregating the preferences of
its members,in some way it will be flawed
as a mechanism for social choice.
The Median Voter is King
In a democratic society,who determines
what policy is chosen?
Each voter has his own most preferred
budget,and he always prefers outcomes
closer to his most preferred value to
outcomes further away.
The median voter is the voter exactly in
the middle of the distribution.
The Median Voter is King
$0 $5 $10 $15 $20
25
15
20
35
5
Number
of people
Preferred size of
budget
In billions
The Median Voter is King
Median voter theorem:
– a mathematical result showing that if voters
are choosing a point along a line and each
voter wants the point closest to his most
preferred point,then majority rule will pick
the most preferred point of the median voter.
The median voter rules the day because
his preferred outcome beats any other
proposal in a two-way race.
The Median Voter is King
The Condorcet paradox cannot arise.
The parties in a two-party system are
similar to each other.
The minority views are not given much
weight
Politicians are People too
Self-interest is as powerful a motive for
political actors as it is for consumers and
firm owners.
Economic policy is made not by a
benevolent god,but by real people with
their own all-too- human desires.
Behavioral Economics
Recently,a field called behavioral economics
has emerged in which economists make use
of basic psychological insights to examine
economic problems.
People aren’t always rational
People care about fairness
People are inconsistent over time
People aren’t always rational
Classical economic theory presumes that
economic agents are always rational who
weight all the costs and benefits and
choose the best possible course of action.
Real people are,maybe,forgetful,
impulsive,confused,emotional,and
shortsighted.
Real people are satisficers or have just
bounded rationality.
People aren’t always rational
Systematic mistakes that people make:
– People are overconfident.
– People give too much weight to a small
number of vivid observations.
– People are reluctant to change their minds.
The assumption,even if not exactly true,is
still a good approximation.
Economists are real people too.
People Care about Fairness
Ultimatum game
The natural interpretation is that people
are driven in part by some innate sense of
fairness.
Throughout the study of household and
firm behavior,the innate sense of fairness
has not played any role.
People are Inconsistent over Time
When looking ahead to the future,people
minimize the amount of time spent on the
dreary task,But faced with the prospect of
doing the task immediately,they choose
to put it off.
Everyone procrastinates from time to time.
Summary
In many economic transactions,information is
asymmetric,
When there are hidden actions,principals may be
concerned that agents suffer from the problem of
moral hazard,
When there are hidden characteristics,buyers may
be concerned about the problems of adverse
selection among sellers,
Private markets sometimes deal with asymmetric
information with signaling and screening.
Summary
Although government policy can sometimes
improve market outcomes,governments are
themselves imperfect institutions,
The Condorcet paradox shows that majority rule
may fail to produce transitive preferences for
society,
Arrow’s impossibility theorem shows that no
voting scheme will be perfect.
In many situations,democratic institutions will
produce the outcome desired by the median voter,
regardless of the preferences of the rest of the
electorate.
Summary
Individuals who set government policy may
be motivated by self-interest rather than the
national interest.
The study of psychology and economics
reveals that human decisionmaking is more
complex than is assumed in conventional
economic theory.
People are not always rational,they care
about the fairness of economic outcomes,
and they can be inconsistent over time.
经济学可以更有趣
为什么律师花在车和衣服上的钱比同等收入的大学教授要多？
为什么经济学里的数学公式越来越多？
为什么接近全新的二手车比新车便宜的多？
为什么中国（日本）参加婚礼的人数比美国要多？
为什么人们在有了异性朋友以后，更容易找到另一个异性朋友？
经济学可以更有趣
为什么外表吸引人的人往往更聪明？
为什么有的女性长的很漂亮却不过是一个花瓶？
为什么女装衣服标注的尺码比实际的要大？
转轮数影响你对世界的估计？
– 实验如下：估计非洲国家是联合国会员国的比率，
在说出数据之前转动一个刻度为 100的转盘，结果转盘数在 10以下的学生估计的平均值为 25%，
而转盘数在 65以上的学生估计的平均值是 45%
经济学可以更有趣
为什么康乃尔大学学生自杀率低于全国大学平均水平，可是却有一个学生自杀率高的坏名声？
房产经纪人的秘诀。
为什么维多利亚的秘密经常推出价值数百万美元但是从来没有人购买的胸罩？
– 1996年,120万美元； 1997年,300万美元； 2006年,650
万美元。
为什么收银员多找了钱我们愿意主动退还但是如果商品漏收了钱我们却不声张？
– 测试：一种情况是多找 20美元，另一种是漏收一个价值
20元的物品；结果是 90%的人会主动退还 20元，但是只有 10%的人愿意事后主动付钱。
Microeconomics
Chapter 22
Outline
The economics of asymmetric information
Political economics
Behavioral economics
Asymmetric Information
A difference in access to relevant
knowledge is called an information
asymmetry
Examples:
– Hidden action
– Hidden characteristic
Hidden Actions
Agent
– a person who is performing an act for another
person called the principal.
Principal
– a person for whom another person,called the
agent,is performing some act.
Moral hazard
– The tendency of a person who is imperfectly
monitored to engage in dishonest or
otherwise undesirable behavior,
Hidden Characteristics,Adverse
Selection and the Lemons Problem
Adverse selection:
– The tendency for the mix unobserved
attributes to become undesirable from the
standpoint of an uniformed party.
Examples,used car,labor market,health
insurance
Signaling and Screening
Signaling:
– An action taken by an informed party to
reveal private information to an unformed
party.
Examples,advertising,diploma
Screening:
– An action taken by an uninformed party to
induce an informed party to reveal
information.
Examples,used car,car insurance
Asymmetric Information
and Public Policy
Asymmetric information may call for
government action in some cases,but
there are some issues else:
The private market can sometimes deal
with information asymmetries itself.
The government rarely has more
information than the private parties.
The government is itself an imperfect
institution.
Political Economy
Before we embrace an activist government,
we need to consider one more fact,the
government is also an imperfect institution.
The Condorcet paradox
Arrow’s impossibility theorem
The Median voter theorem
Politicians with self-interest motive
The Condorcet Voting Paradox
Voter Type
Type 1 Type 2 Type 3
Percent of electorate 35 45 20
First Choice A B C
Second Choice B C A
Third Choice C A B
The Condorcet Voting Paradox
Condorcet paradox,the failure of majority
rule to produce transitive preferences for
society.
The order on which things are voted can
affect the result.
The narrow lesson
The broad lesson
Arrow’s Impossibility Theorem
Five conditions:
– Completeness
– Unanimity
– Transitivity
– Independence of irrelevant alternatives
– No dictators
Conclusion,no voting system can satisfy all
these conditions,(Arrow’s impossibility
theorem)
Arrow’s Impossibility Theorem
No matter what voting scheme society
adopts for aggregating the preferences of
its members,in some way it will be flawed
as a mechanism for social choice.
The Median Voter is King
In a democratic society,who determines
what policy is chosen?
Each voter has his own most preferred
budget,and he always prefers outcomes
closer to his most preferred value to
outcomes further away.
The median voter is the voter exactly in
the middle of the distribution.
The Median Voter is King
$0 $5 $10 $15 $20
25
15
20
35
5
Number
of people
Preferred size of
budget
In billions
The Median Voter is King
Median voter theorem:
– a mathematical result showing that if voters
are choosing a point along a line and each
voter wants the point closest to his most
preferred point,then majority rule will pick
the most preferred point of the median voter.
The median voter rules the day because
his preferred outcome beats any other
proposal in a two-way race.
The Median Voter is King
The Condorcet paradox cannot arise.
The parties in a two-party system are
similar to each other.
The minority views are not given much
weight
Politicians are People too
Self-interest is as powerful a motive for
political actors as it is for consumers and
firm owners.
Economic policy is made not by a
benevolent god,but by real people with
their own all-too- human desires.
Behavioral Economics
Recently,a field called behavioral economics
has emerged in which economists make use
of basic psychological insights to examine
economic problems.
People aren’t always rational
People care about fairness
People are inconsistent over time
People aren’t always rational
Classical economic theory presumes that
economic agents are always rational who
weight all the costs and benefits and
choose the best possible course of action.
Real people are,maybe,forgetful,
impulsive,confused,emotional,and
shortsighted.
Real people are satisficers or have just
bounded rationality.
People aren’t always rational
Systematic mistakes that people make:
– People are overconfident.
– People give too much weight to a small
number of vivid observations.
– People are reluctant to change their minds.
The assumption,even if not exactly true,is
still a good approximation.
Economists are real people too.
People Care about Fairness
Ultimatum game
The natural interpretation is that people
are driven in part by some innate sense of
fairness.
Throughout the study of household and
firm behavior,the innate sense of fairness
has not played any role.
People are Inconsistent over Time
When looking ahead to the future,people
minimize the amount of time spent on the
dreary task,But faced with the prospect of
doing the task immediately,they choose
to put it off.
Everyone procrastinates from time to time.
Summary
In many economic transactions,information is
asymmetric,
When there are hidden actions,principals may be
concerned that agents suffer from the problem of
moral hazard,
When there are hidden characteristics,buyers may
be concerned about the problems of adverse
selection among sellers,
Private markets sometimes deal with asymmetric
information with signaling and screening.
Summary
Although government policy can sometimes
improve market outcomes,governments are
themselves imperfect institutions,
The Condorcet paradox shows that majority rule
may fail to produce transitive preferences for
society,
Arrow’s impossibility theorem shows that no
voting scheme will be perfect.
In many situations,democratic institutions will
produce the outcome desired by the median voter,
regardless of the preferences of the rest of the
electorate.
Summary
Individuals who set government policy may
be motivated by self-interest rather than the
national interest.
The study of psychology and economics
reveals that human decisionmaking is more
complex than is assumed in conventional
economic theory.
People are not always rational,they care
about the fairness of economic outcomes,
and they can be inconsistent over time.
经济学可以更有趣
为什么律师花在车和衣服上的钱比同等收入的大学教授要多？
为什么经济学里的数学公式越来越多？
为什么接近全新的二手车比新车便宜的多？
为什么中国（日本）参加婚礼的人数比美国要多？
为什么人们在有了异性朋友以后，更容易找到另一个异性朋友？
经济学可以更有趣
为什么外表吸引人的人往往更聪明？
为什么有的女性长的很漂亮却不过是一个花瓶？
为什么女装衣服标注的尺码比实际的要大？
转轮数影响你对世界的估计？
– 实验如下：估计非洲国家是联合国会员国的比率，
在说出数据之前转动一个刻度为 100的转盘，结果转盘数在 10以下的学生估计的平均值为 25%，
而转盘数在 65以上的学生估计的平均值是 45%
经济学可以更有趣
为什么康乃尔大学学生自杀率低于全国大学平均水平，可是却有一个学生自杀率高的坏名声？
房产经纪人的秘诀。
为什么维多利亚的秘密经常推出价值数百万美元但是从来没有人购买的胸罩？
– 1996年,120万美元； 1997年,300万美元； 2006年,650
万美元。
为什么收银员多找了钱我们愿意主动退还但是如果商品漏收了钱我们却不声张？
– 测试：一种情况是多找 20美元，另一种是漏收一个价值
20元的物品；结果是 90%的人会主动退还 20元，但是只有 10%的人愿意事后主动付钱。
