Friday

April 18, 2014

April 18, 2014

Posted by **lori** on Thursday, May 2, 2013 at 1:20am.

If bicycle owners do not know whether they are high- or low-risk consumers, is there an adverse

selection problem?

19-2 IPOs and Adverse Selection

Should owners of a private company contemplating an IPO (a sale of stock to the public) release

information about the company, or keep as much of it as they can to themselves?

19-3 “Soft Selling” and Adverse Selection

Soft selling occurs when a buyer is skeptical of the quality or usefulness of a product or service.

For example, suppose you’re trying to sell a company a new accounting system that will reduce

costs by 10%. Instead of asking for a price, you offer to give them the product in exchange for

50% of their cost savings. Describe the information asymmetry, the adverse selection problem,

and why soft selling is a successful signal.

19-4 Student Work Groups

You’ll complete a number of your school assignments in small groups, many of which will be

student selected. Assume group members are rational and select fellow group members basedon their

assessment of teammates’ intellectual and productive capabilities. Someone you don’t

know invites you to join a group. Should you accept? (Hint: Think about the information

asymmetry.)

19-5 Hiring Employees

You need to hire some new employees to staff your start-up venture. You know that potential

employees are distributed throughout the population as follows, but you can’t distinguish

among them:

Employee Value Probability

50,000 .25

60,000 .25

70,000 .25

80,000 .25

What is the expected value of employees you hire?

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