Tag: Information Economics
Adverse selection happens when one party in a deal knows more than the other, leading to unfair outcomes. This can be a big issue in areas like insurance, loans, and used car sales. While there are strategies to manage it, unchecked adverse selection can cause market problems and privacy concerns.
The Principal-Agent Problem occurs when a person (the principal) hires someone else (the agent) to act for them, but the agent may not always act in the principal’s best interest due to differing information or motives. Solutions involve creating better incentives and transparency.