...Q2:The XYZ Co. is hiring salespersons. Due to the existence of asymmetric information, the firm has decided to pay the salespersons a fixed hourly rate that is independent of how much they sell or their ability to sell. Explain what type(s) of asymmetric information problem(s) may take place and how can they be addressed. You are expected to illustrate your answer using relevant diagrams and/ or equations. ECN256 ASYMMETRIC INFORMATION ECN256 ASYMMETRIC INFORMATION Salespersons, being boundary spanners between the organization and customers, play a critical role in enhancing customer satisfaction in order to maintain the buyer–seller relationship in situations involving service failures (Naylor & Frank, 2000). Companies hire sales people as employee’s or on a commission basis. According to the question, the firm is hiring a salesperson that will be paid an hourly rate. Paying hourly rate at start is preferable compare to that of commission. Because if the firm and its product is popular and the sales person effort level is high; therefore, in order to motivate the salesperson fixed hourly rate is advisable because whether the salesperson sales or not they still have their fixed hourly rate and also is independent of how much the firm sell or their ability to sell. Unlike commission, the higher you sale the higher you are been compensated and the lower you sale the lower you are been commissioned. Salespersons that are been commissioned, tend to feel ownership of their...
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...an example relating to the financial markets to illustrate your answer. • asymmetric information • moral hazard • quantitative easing (QE) Asymmetric information In the financial market, asymmetric information is a situation in which economic agents involved in a transaction have different information. It happens in the transaction when the buyer has more information than the seller, or contrary, as when a private motorcycle seller has more detailed...
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...Working paper Summarization The term Asymmetric information is defined as the unequal knowledge possessed by the parties to a market transaction. Information is crucial for buyers and sellers in the business world today, and sometimes the buyers don’t always have all the information. The second chapter in the book FREAKONOMICS tells us how individuals, organizations, and businesses often exploit their access to crucial information at the expenses of others. The KKK used to be a very profitable organization in America until the 1940’s. Stenson Kennedy had a hatred for the Klan, and in the 1940’s joined the KKK to exploit the Klan’s secrets. What Kennedy found was the Klan was a slick moneymaking organization for those near the top of the organization. The Klan had a number of revenue sources: thousands of dues from membership fees, businesses that would hire the Klan to scare off unions, or pay the Klan protection money, and Klan rallies that generated huge cash donations. When Kennedy discovered this he wrote a letter to the governor of Georgia requesting the charter be revoked. The reason for this was the Klan had been designated a non profit organization, but Kennedy had proof it was clearly devoted to profit. Kennedy still wasn’t getting the desired affect he wanted because even though this would damage the clan in Georgia there would still be other clans around the country that wouldn’t be hurt. He then decided to turn to the radio, once he knew the secrets of the...
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...Why do markets fail? There are a number of reasons as to why markets fail and there are five different types of markets that this can be brought down to. These include: Monopoly, Collusion, Asymmetric information, Externalities and Public good and the free rider problem. Monopoly A monopoly can be seen as a form of market failure and this is because unlike in perfect competition, firms with large market power have the ability to inflate their prices as they are usually the ‘price-makers’. The price at which something will be sold is usually determined by the interaction of the supply and demand within the market. A monopoly can either set the selling price or quantities – but not both. The reason for this is because although they have a substantial amount of market power, they don’t have unlimited market power. Not only does the price depend on the actual market power of a firm, but it also depends on the actual demand of the good / service. The reason for this is because if the demand for a good / service was already low, but the firm decided to increase the price, then the demand would become even lower as customers may not be willing to pay that much. An explained graph of a monopoly can be found in the ‘imperfect competition’ section of the essay (Page 4). Perfect / Imperfect Competition Perfect competition Perfect Competition (Occasionally named Pure Competition) is when no competitor in the market has enough market power in order to attempt to rig the price of a...
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...The Analysis of Market Failure in the U.K and the U.S. Health Care System Contents Executive Summary 3 1. Introduction 3 2. Findings 3 2.1 The health care system in the U.S. 3 2.1.1 Adverse selection 4 2.1.2 Moral hazard 4 2.1.3 Market power (the pharmaceutical firm) 5 2.1.4 The Medicare-Medicaid 7 2.1.5 Suggestions and solsolutions...................................................8 2.2 The health care system (NHS) in the UK 9 2.2.1 Asymmetric informtion 9 2.2.2 Incentive problems 9 2.2.3 Market power of the health authority 10 2.24 Suggestions and solutions....................................................... 11 3. Conclusion 12 Reference List 12 Executive summary The main purpose of this report is to assess two approaches to health care, and briefly discuss market failures and the induced inefficiencies in them with the comprehension of applied microeconomics. This report will try to link the facts in health care provision with the essence of each health care system. Several practical proposals will be constructed. 1. Introduction Health care, as one of the most complicated public services, is an essential issue both in economic and social areas. The provision of health care is a matter of a whole nation’s welfare quality. In the contemporary world, there are two dominate but distinguishable health care systems. One is publicly provided...
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...Immobility * Occurs when barriers between markets prevent factors of production moving from one area to another to find employment * Land is completely immobile and certain types of capital, for examples factory buildings, can only be moved with extreme difficulty and cost. * Usually geographical immobility refers to the ease or difficulty of labour moving between different areas of the country, or between countries. Factors for geographical immobility: 1. Financial costs in moving home 2. Cost of selling house and removal expenses 3. Large regional variation in house prices which leads to a shortage of affordable housing. 4. Family and Social Ties 5. Immigration controls and language differences Occupational Immobility * Arises when workers lack the skills to move between different types of employment, and because it would be very expensive and time consuming to train workers to have the necessary skills to switch between certain jobs. * Sometimes training is not available and some workers lack the aptitude of taking on different types of employment. * For example, workers made redundant in the coal mining industry lack the specific skills that are needed in growing industries such as the provision of financial services. * All this leads to unemployment and a waste of scarce resources, and contribute to market failure in factor markets. Information Failure * Information failure occurs when people have inaccurate, incomplete...
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...Count: ____1492________ Asymmetric Information and Its impact upon the Market Function Introduction Financial market functioning is based on certain fundamentals and technical principles. Information about the market scenarios and the background activities are stated as the fundamental aspects of the financial market movements. If a deal is being carried out between two entities and one entity possesses additive information over another then this scenario reflects the actualization of an unfair financial transaction. The possession of additive information by one entity over another in the financial market is stated as information asymmetry or asymmetric information (Hughes, Liu and Liu, 2007). The current discussion includes the overall assessment of various theories that had been presented over the period of time and their practical application into the financial market in context of asymmetric information. In addition, the discussions carried out in the current essay also elaborate the impact of asymmetric information over the financial activities that are carried out in the financial markets. Asymmetric Information and Its impact upon the Market Function In reference to economics as well as to that of contract theory, the concept of asymmetric information reflects the view of an unfair advantage of one entity over another entity in context of information regarding...
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...Research in Higher Education Journal Centering the business capstone course on the banking crisis: concrete integrated pedagogy Khalid A. Razaki Dominican University Wayne Koprowski Dominican University Peter Alonzi Dominican University Robert Irons Dominican University Abstract The recent financial crisis offers instructors rich material for business programs regarding the relations between accounting, business law, economics, and finance, as well as ethical issues. This paper offers a concrete approach to developing a business capstone course built around the financial crisis and the lessons it offers business students. Complete pedagogical modules are offered for each discipline, including suggestions for specific assignments in each discipline. Key Words: Capstone Course, Banking Crisis, Pedagogy Centering the Business Capstone Course, Pate 1 Research in Higher Education Journal INTRODUCTION A capstone course is essential in the business school curriculum. It provides each student the time to refresh their grasp of and to hone their ability to apply the principles, tools, and methods of the fields comprising the business curriculum. Further, it gives students the opportunity to integrate the insights of the various fields. The effectiveness of the capstone course can be enhanced by centering the capstone course on the 2008 financial crisis. All students share the common experience of the 2008 crisis’s violent shaking of the economy. It immediately affected each...
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...Kevin Pine Eco310 Professor Ambrose Test 2 1A. Market failure is a situation in which the allocation of goods and services is not efficient. In any given market, the quantity of a product demanded by consumers does not equate to the quantity supplied by suppliers. This is a direct result of a lack of certain economically ideal factors, which prevents equilibrium. Some major reasons that a free, unregulated market in medical care might night be optimal are: Imperfect information, asymmetric information, barriers to entry, and third-party payers. * Imperfect information is a major reason because in medical markets, patients are not fully informed about virtually every aspect of the medical transaction. These patients are forced to rely on their physicians to form a learned opinion on their illness, their diagnosis, and their prescribed treatment. In addition, patients are often confronted with the problem of little to no knowledge at all about prices and the quality differences among alternative providers. This lack of knowledge gives rise to asymmetric information, which leads to two important market defects. First, patients are not able to judge price and quality differences among providers. As a result, providers charge prices that are above the prevailing market prices for a given level of quality. Second, the agency problem, which arises when the physician serves as the patient’s agent, thereby leading the patient to delegate most of the decision-making authority...
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...subject, namely interest rate risk/market risk, liquidity risk and credit risk, as well as broader systemic risks. We then examine economic issues relating to the core of banks’ traditional business, namely onbalance-sheet lending. We focus in particular on the various ways in which banks seek to control the risks arising from their loan books. This discussion includes a brief assessment of issue of credit rationing which is an issue of both microeconomic and macroeconomic significance. Bank risks – an overview What is risk? – danger that a certain unpredictable contingency can occur, which generates randomness in cashflow Risk and uncertainty – risks may be described using probability analysis (business cycle, company failures), while events subject to uncertainty cannot (financial crises, wars etc.) Risk and variability – variability alone may not entail risk as long as known for sure ex ante The nature of qualitative asset transformation- gives rise to risks because of mismatched balance sheet. Main forms of risk Credit risk – risk that party to contract fails to fully discharge terms of contract Interest rate risk – risk deriving from variation of market prices owing to interest rate change Market risk – more general term for risk of market price shifts Liquidity risk – risk asset owner unable to recover full value of asset when sold (or for borrower, credit not rolled over) Market liquidity risk – risk that a traded asset market may vary in liquidity of the claims...
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...intermediaries exist is a puzzle for the “complete markets” paradigm of Arrow and Debreu. As we describe in this lecture, the reasons why intermediaries such as banks exist is related to the various market failures which vitiate the complete markets paradigm. In particular, there is the key issue of imperfect information which makes financial institutions such as banks key channels for intermediating between savers and borrowers. We cover the key concepts of liquidity insurance and delegated monitoring in this context Why intermediation? Definition: Intermediate between providers and users of financial capital Besides banks - pension funds, insurance companies, securities firms (differ in terms of assets. liabilities, matching). - But in an Arrow-Debreu “complete markets” world, financing of firms and governments by households occurs via financial markets – no transactions costs, full set of contingent markets, no credit rationing, Pareto optimal allocation and no role for intermediaries - Moreover, (Modigliani-Miller) financial structure is irrelevant as households can construct portfolios offsetting actions of intermediaries and intermediaries cannot add value - Corollary - markets are not strong form efficient or banks would not exist. Banks rather assist market efficiency as their information spills over. Why do intermediaries exist? (1) Transactions costs restricting scope for direct financing, or incomplete information means financial markets cannot be complete in an Arrow Debreu...
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...Financial institutions Financial markets End users of the markets and institutions Regulatory authorities 1 4/12/2012 FINANCIAL INSTITUTIONS Deposit-taking institutions •Banks •Building societies •Credit unions •Friendly societies Principal liabilities are deposits Non-deposit-taking institutions •Insurance companies •Investment banks •Pension funds •Unit trusts and OEICs •Investment trusts Principal liabilities are not deposits FINANCIAL SERVICES Financial intermediation provided by all financial institutions Insurance and pensions provided by insurance companies and pension funds Payments provided by banks and building societies Portfolio adjustment provided by unit trusts, open-ended investment companies (OEICs) and investment trusts FINANCIAL MARKETS Definition: Financial markets are markets in which funds are transferred from those who have excess funds (savers, lenders) to those who have a shortage (investors, borrowers). Structure: Debt and Stock Markets Primary and Secondary Markets Money and Capital Markets 2 4/12/2012 DEBT AND STOCK MARKETS Debt market: the market for trading debt instruments Debt instruments: • A paper or an electronic obligation that enables an issuer to raise funds by promising to repay a lender in accordance with terms of a contract. • Short-term, intermediate-term, long-term debt instruments • E.g.: bonds, notes, certificates,… Stock market: The market in which shares/equities are issued...
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...Case study of eBay As an efficient and flexible sales channel, online auction businesses are becoming an internationally successful phenomenon. People can use auction sites as a market to conduct sales, to liquidate unwanted inventory, as well as to reaching markets that would otherwise be too expensive to reach. However, there are potential problems with feedback systems in the OAM, in other word, seller incentives to provide high quality products under the case of asymmetric information, for example buyers are not able to discern product quality prior to making their purchase decisions while sellers are aware of the quality of their product offerings, as a result dishonest or low-quality sellers will drive honest and high-quality sellers out of market. Obviously, beside the transaction cost of determining the required good is available on the market, which has the lowest price, there are other transaction costs within the online auction business for both sellers and buyers. From seller’s perspective, their decision on the which auction service to use are depended on following factors: cost of listing an auction item and the chance that a product will be sold. In the case of eBay and Yahoo!Auction, eBay charges sellers both listing fee and a percentage commission of the item sold. Yahoo!Auction, on the other hand, offers free listing. However, Yahoo!Auction suffers from a much lower successful transaction probability than eBay. Thus, a seller should trade off between balance...
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...Student’s Name: Course Name: Instructor’s Name: Institution: Date: Consumer choice theory is a microeconomics branch that tries to relate preferences to both consumer demand curves and consumer expenditures. The theory analyses the way consumers maximize their need to consume which is measured by their preferences against the limited ways on their expenditure. Consumers do this by utility maximization subject to a constraint on their budget. Other times it gets referred to as the theory of consumer behavior. Through the study of this theory, researchers can explain why the consumers would buy more of the product when its price is less as compared to when its price is high. Another elaboration of the theory is that it shows the reason why the households spend their income as they always do (Haugtvedt, Herr, & Kardes, 2008). The greater assumption is that every consumer is rational and aims at maximizing their satisfaction. Some major theories explain the consumer behavior. First is the Cardinalist approach or the marginal utility theory and the second is the ordinalist approach or the analysis of the indifference curves. The former describes extra satisfaction a consumer derives after consuming an extra unit of a commodity while consumption of all other products remains unchanged. The law of diminishing marginal utility gives a thorough elaboration on why the demand curves always have a downward sloping nature. The latter shows the line of combinations (indifference curves)...
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...most significant motivations to adopt conservatism such as contracting demand, litigation pressure, agency problem, tax implication, regulation concern and political economy will be discussed in section three. For the purpose of construction, regression analysis, as the most commonly used research technique, are also analyzed in section four of this paper, which also includes a summary of the requirements in sample selection process. Meanwhile, another crucial aim of this paper is to introduce the empirical evidence of a positive relationship between information quality and conditional conservatism. In section five, this paper intends to explain the empirical findings of Iatridis (2011) that a high quality accounting information discloser will apply conditional conservatism but restrict unconditional conservatism. 2.0 Literature Review Researchers commonly characterize accounting conservatism as “asymmetric timeliness in recognition of accounting gains versus losses and systematic understatement of net assets” (Chi et al. 2009: 48). In other words, conservatism can be broadly described as the speed of good news acknowledgement relative to bad news acknowledgement in earnings (Bushman, 2006). One of the most distinguished measure of conservatism was suggested by Basu (1997). Through regression analysis, Basu investigated the rate of the change in earnings with respect to the change in concurrent stock...
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