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ASYMMETRIC INFORMATION

ASYMMETRIC INFORMATION. 14.1. Economic settings in which one side has better information than the other. . Buying a Company Firm T is worth $20 a share or $80 (50-50 chances) depending on the outcome of a patent dispute.

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ASYMMETRIC INFORMATION

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  1. ASYMMETRIC INFORMATION 14.1 Economic settings in which one side has better information than the other. Buying a Company Firm T is worth $20 a share or $80 (50-50 chances) depending on the outcome of a patent dispute. If acquired by Firm A, synergies are worth an additional $20 per share. What tender offer is best for firm A? Asymmetric information leads to adverse selection and prevents mutually beneficial transactions.

  2. PRINCIPLE-AGENT PROBLEMS 14.2 A Building Contract Adverse Selection occurs when the agent (whose interests are at odds with the principal’s), holds unobservable or hidden information. Moral Hazard occurs when the agent (whose interests are at odds with the principal’s), takes unobservable or hidden actions. Bidding for Baseball Free Agents Bidding for an Oil Lease

  3. ORGANIZATION DESIGN 14.3 Firms are organized to minimize the total cost of production, including transaction costs. Three Important Issues 1. In House or Out Sourcing 2. Centralized or Decentralized 3. Providing the Right Incentives

  4. INCENTIVE PAY 14.4 Effort Level Gross Profit Disutility Net Profit Super $90 k -$60 k $30 k High $85 k -$45 k $40 k Medium $75 k -$39 k $36 k Low $60 k -$35 k $25 k The worker chooses low effort if paid a flat wage. The worker will rationally expend extra effort only if better profit results mean she receives bonus pay. What profit-share fraction is needed to induce optimal effort from the worker?

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