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Asymmetric Information and Signaling

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A Teaching Topic in Economic Analysis 

Asymmetric Information and Signaling

This topic explores the differences in the information available to buyers and sellers participating in an exchange. It examines the role of this asymmetry in causing market failures and adverse selection (Toronto PPG 1002). The associated concept of signaling is also explored, where buyers or sellers "take actions to distinguish themselves from their lower-ability counterparts" (Gershkov 10). 

Topic Learning Outcome: Appropriately utilize and interpret results of applying the principles of asymmetric information and signalling to the analysis of public policy and management problems.

Core Concepts associated with this Topic: Asymmetric Information.

Recommended Reading

Carleton Unversity: PADM-5111

Frank, Robert, Ian Parker, and Igela Alger. Microeconomics and Behaviour, 5th Canadian Edition. New York: McGraw-Hill, 2013. Chapter 6.

Harvard Kennedy School: API-101

Pindyck, Robert S. and Daniel L. Rubinfeld. Microeconomics, 8th Edition. Prentice-Hall, 2012. Chapter 17 (p. 631-651).

NYU Wagner: GP-1018

Krugman, Paul and R. Wells, Microeconomics, 3rd edition. London: Worth Publishers, 2012. Chapters 11 (pp. 333-337), 13, and 14 (up to p. 413).

Ford School of Public Policy: Public Policy 555

Pindyck, Robert S., and D. Rubinfeld. Microeconomics, 7th edition. Upper Saddle River: Patience-Hall, 2007. Chapter 5. 

George Washington: PPPA-6003

Wheelan, Charles. Naked Economics: Undressing the Dismal Science. New York: W. W. Norton & Company, 2010. Chapter 5.

Stiglitz, Joseph E. "Imperfect information in the product market." Handbook of industrial organization 1 (1989): 769-847.

Rutgers: Economics in Public Policy

Pindyck, Robert S., and D. Rubinfeld. Microeconomics, 7th edition.  Upper Saddle River: Patience-Hall, 2007. Chapter 17.

 Sample Assessment Questions:

1.) What do economists mean when they refer to asymmetric information? Why does asymmetric information sometimes prevent Pareto-improving exchanges?

2.) What is adverse selection? Explain the importance of this concept using an example.

3.) Some experts in higher education argue that in addition to human capital development, many post-secondary education participants pay for and pursue degrees for signaling purposes. What is meant by this claim?

Page updated by Sean Goertzen and Ben Eisen on 16 April 2015.


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School of Public Policy and Governance