1. Managerial Economics-Charles W. Upton Dealing with Asymmetric Information

2. Remedies to the Lemons Problem Warranties

3. Dealing with Asymmetric Information Warranties You are selling used cars People worry about lemons

4. Dealing with Asymmetric Information Warranties You are selling used cars People worry about lemons Provide a warranty!

5. Dealing with Asymmetric Information Warranties and Moral Hazard However, warranties also create moral hazards. What incentives does the buyer have to maintain the car? Why should a buyer change the oil with a 100,000 mile warranty?

6. Dealing with Asymmetric Information Remedies to the Lemons Problem Warranties Testing

7. Dealing with Asymmetric Information Remedies to the Lemons Problem Warranties Testing –Take a used car to a mechanic for testing

8. Dealing with Asymmetric Information Remedies to the Lemons Problem Warranties Testing Reputation.

9. Dealing with Asymmetric Information Remedies to the Lemons Problem Warranties Testing Reputation –Buy a used car from a new car dealer

10. Dealing with Asymmetric Information Reputation Buy a used car from a new car dealer Buy from a close friend or relative

11. Dealing with Asymmetric Information Advertising Advertising promotes reputation..

12. Dealing with Asymmetric Information Advertising Advertising promotes reputation. –Bad stories ruin the reputation of advertised products. Thus you advertise only quality products.

13. Dealing with Asymmetric Information Advertising Advertising promotes reputation. –Bad stories ruin the reputation of advertised products. Thus you advertise only quality products. –Advertising has a cumulative effect on demand. Much advertising doesn’t make sense if the dealer does not intend to stay in business.

14. Dealing with Asymmetric Information The Legal Remedy Economists stress the importance of the law as a remedy

15. Dealing with Asymmetric Information The Legal Remedy The law requires reasonable disclosures

16. Dealing with Asymmetric Information The Legal Remedy The law requires reasonable disclosures Suppose you sell me a car without oil in the tank and save $20.

17. Dealing with Asymmetric Information The Legal Remedy The law requires reasonable disclosures Suppose you sell me a car without oil in the tank and save $20. –If you disclose and I don’t fill, I am out of luck –If you don’t disclose, you are liable.

18. Dealing with Asymmetric Information The Game of Baseball

19. Dealing with Asymmetric Information The Game of Baseball

20. Dealing with Asymmetric Information The Game of Baseball

21. Dealing with Asymmetric Information The Game of Baseball

22. Dealing with Asymmetric Information The Game of Baseball

23. Dealing with Asymmetric Information The Game of Baseball

24. Dealing with Asymmetric Information Are Trucks Lemons?

25. Dealing with Asymmetric Information Are Trucks Lemons? If they are, why aren’t these numbers radically different?

26. Dealing with Asymmetric Information End ©2004 Charles W. Upton