economics

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micro-economics

How Prices are Determined

Adam Smith's Invisible Hand

contract theory

Contract theory is a theory that focuses on contracts, which are agreements between parties to transactions of goods and services, and explains phenomena that arise because of the costs involved in concluding and managing the performance of contracts, differences in the information held by the contracting parties (Hidden Information), incomplete mechanisms for monitoring the performance of contracts (Hidden Action), and limited rationality in the ability to process information (Limited Rationality). It is a microscopic theory that explains phenomena that arise because of the cost of entering into and managing the performance of contracts, differences in information held by the contracting parties (Hidden Information), imperfect mechanisms for monitoring contract performance (Hidden Action), and limited rationality in the ability to process information (Limited rationality).

The seller knows the quality of the goods.

Buyers do not know the quality of goods

Buyers are only willing to pay for average quality.

Seller does not produce good quality goods

Only the worst quality products will be distributed.

Akerlof, G (1970), “The market for lemons: quality uncertainty and the market mechanism”, Quarterly Journal of Economics 84 (3): 488-500

'I'm insured, so I can engage in risky behavior.'

signalling

Signaling in the Job Market

'I got into college and graduated' signals competence.

screening

Unlike signaling, the side with less information is considered a strategy to fight information asymmetry

In hiring salespeople, employers with little information offer low fixed and commission wages.

People who know they are not capable of doing well are no longer avoiding percentage pay.

In 2001, George Akerlof, Michael Spence, and Joseph E. Stiglitz received the Nobel Prize in Economics for their work on information asymmetry

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