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Chapter 19: Asymmetric Information
Key Concepts
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- Adverse selection: opportunism that occurs because of asymmetric information.
- Signaling: actions taken by informed parties with higher quality items or greater skills that allow uninformed parties to infer quality or skill.
- Screening: actions taken by uninformed parties that attempt to separate sellers with higher quality items from sellers with lower quality items.
- Lemons market: an outcome where low quality units drive high quality units from the market; also sometimes known as "Akerlof's lemons model" in honor of the man who first described it.
- Cheap talk: claims or promises that can't be verified.
- Separating equilibrium: an outcome where agents' actions differ by the quality of their items.
- Pooling equilibrium: an outcome where agents' actions do not differ with quality.
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