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Asymmetric Information &
3Business
Problem Set 3
Due next Thursday (11/16)
3
4Business
Sections next week
Before 5 pm on Tuesday
Watch two short videos, including a debate about microfinance.
Complete “Pre-section Quiz” – questions embedded in the video
Discuss and debate the merits of micro-finance in section
Video will be posted by end of day on Friday
As you watch the video
What stood out to you?
What are key arguments in favor of micro-finance as a poverty
alleviation strategy?
What are key arguments against micro-fiancé as a poverty
alleviation strategy?
Don’t forget to complete post-section quiz for this week’s section by
Sunday
4
Asymmetric Info and the QUALITY
of a credit contract
5
5
MYSTERY: Existence of Credit Rationing
(Excess Demand)
Plenty of talented, hard-working poor have great ideas for
businesses or productive investments
But lenders may be unwilling to offer loans even though
potential borrowers are willing to pay higher interest rates
Why?? Why won’t lenders accept the higher interest rate and
offer these loans?
6
7“Asymmetric Information” Paradigm
Field of “Economics of information” emerges in the 1980’s.
Stiglitz, Akerloff, and Spence win Nobel prize in 2001 – primarily for
economics of information.
Powerful framework for understanding how information problems can cause
imperfections in many markets where contracts are critical.
Revolves around two basic notions:
Adverse Selection
Moral Hazard
These two concepts will help us answer the question:
Why won’t the lender raise the interest rate to eliminate excess demand (get
rid of credit rationing)?
Next week: Why is it so difficult to offer insurance?