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Problem of market failure and the need for government intervention in the market system
Problem of market failure and the need for government intervention in the market system
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Asymmetric information is a problem which faces managers of firms everywhere. It occurs where one party to a transaction has more information than the other party to said transaction. This of course creates other problems for the managers as well. We can identify four main areas where asymmetric information causes problems. The problems caused are adverse selection, moral hazard, hiring practices and insider trading. This essay will follow the structure of firstly defining and further explaining each of these topics and what affect each has on the manager. We will then move onto possible solutions for these problems, which include screening, signalling and government intervention. Finally in this essay each of these solutions will be critically evaluated to show which of these is best suited for each problem created by asymmetric information.
Adverse selection is what occurs due to asymmetric information before the transaction actually takes place. It occurs due to a type of asymmetric information called hidden characteristics. Hidden Characteristics are things that one party to a transaction knows about itself but which are unknown by the other party (Baye, 2000). Adverse selection is a situation where a selection process ends with only those with undesirable characteristics left. Probably the best example of adverse selection is car insurance. Let us assume that there are two types of poor drivers, those that are just bad drivers and those that are just purely unlucky. This explains why there are some good drivers who have huge premiums or just can't get car insurance. The insurance company cannot determine which of the drivers have bad driving habits and which have only had a string of bad luck accidents. Therefore for the i...
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...al hazard, and uncertainty in hiring practises it is easy to see why this is a problem for managers. However as has been shown there are certain solutions to some of these problems, but many of these are solutions that have incomplete information in themselves. Therefore, it is obvious that in the foreseeable future there will always be asymmetric information for managers to deal with, and they are probably best informed to use the solutions presented here but also just use their best judgement.
REFERENCES
Baye, Michael. R, Managerial Economics & Business Strategy, 3rd Ed, 2000, McGraw-Hill, USA
Pass, Christopher, et al, Collins Dictionary Economics, 3rd Ed, 2000, HarperCollins Publishers, Glasgow
Katz, Michael L., Rosen, Harvey S., Microeconomics, 3rd Ed, 1998, Irwin/McGraw-Hill, USA
Hirshleifer, Jack , Time, Uncertainty, and Information, 1989, Oxford
Mary Archer is the wife of Jeffery Archer, and also she is a director for Anglia TV Company. The insider trading rule that Mary may have violated is that if she did tell her husband about the insider information from board meetings, she should beware that director’s close relatives are not allowed to deal ahead of takeover bids. Also questions arise in the article, that as it is accepted that Mary did not tell her husband about the bid, how much information has found out without her knowledge. If she did share information with her husband than she violate the rule of insider trading which states that:”Insider shouldn’t communicate private information to others who are likely to use it”.
Two individual employees wanted to complete their assignment for their company. But, did their strategy go about accuracy? Karel Svoboda works for Rogue Bank. Svoboda is a credit officer who needed Alena Robles, independent accountant, assists to evaluate and approved his employer’s extensions of credit to clients. In order to complete the task, Svoboda needed to access the nonpublic information about the clients’ personal information related to the company such as their profits and performances. Instead of appropriately following the company policy, Svoboda and Robles created a plan to utilize this data to exchange securities. According to their plan, Robles exchanged the securities of more than twenty unique organizations and benefitted by
Wood, E (2010, December). Enhancing Performance by Reducing Uncertainty in Expatriate Assignments. Retrieved from http://www.regent.edu/acad/global/publications/rgbr/vol4iss1/RGBRVol4Iss1Art3.pdf
MYERS, S.C. and MAJLUF, N.S., 1984. Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), pp. 187-221.
Adverse selection is the process by which other economic factors select the worst possible applicants for a position. This is seen in how risky drivers will purchase insurance more often than
Cost is also determined by your age, gender, where you live, how many miles on the car, and what type it is. For example if an 18 guy and 34 woman buy their insurance in NJ, him a 98 Toyota Celica with 45,000 miles, her a new BMW 530I, and both living in Ridgewood. The guy would pay more for his insurance because he’s more prone to have an accident with his sports car and he has less experience behind the wheel then she does.
2) Personnel selection- what might individual indifferences mean when it comes time to hiring people (interests).
This case study is not about Ms. Stewart direct participation with illegal insider trading as the media had steered the public to believe. To begin, Ms. Stewart received a phone call from Ann Armstrong, her assistant, stating that Peter Bacanovic, her stockbroker, “thinks ImClone is going to start trading down.” (Arnold, Beauchamp, Bowie, 2013, p. 390) Although Ms. Stewart was not able to get a hold of Peter, she talked to his assistance, Douglas Faneuil,
First to be discussed is a concrete definition of “insider trading” as it is discussed in this essay. According to the “European Communities 1989 Insider Dealing Directive: insider trading is the dealing on the basis of materials unpublished, price-sensitive information possessed as a result of one’s employment.(Insider Trading)”
This shows how a lack of transparency in reporting of financial statements leads to the destruction of a company. This all happened under the watchful eye of an auditor, Arthur Andersen. After this scandal, the Sarbanes-Oxley Act was changed to keep into account the role of the auditors and how they can help in preventing such
...ing vacancies. At the same time, organizations such as a 200 bed hospital should prevent their company from becoming homogenous and stagnate. External candidates should not just be recruited to file entry level positions; they should be recruited to file high level positions when experience and qualifications are needed and it is absence within the organization.
3. Glahe, Fred R. Macroeconomics Theory and Practice. USA. Harcourt Brace Jovanovich Inc. 1992. Websites 1.
Barclay, J.M. (1999). Employee selection: a question of structure. Personnel Review, 28(1/2), 134-151. Retrieved February 24, 2011, from ABI/INFORM Global. (Document ID: 116360242).
In the future, employing organizations will face a wide range of issues and challenges in meeting their workforce requirements. These periods of difficulties generally will center around the effects of external environmental influences on the organization and the manner in which it manages ongoing issues. Many of these external factors filter down and influences an organizations roles and responsibilities for talent scarcity, changing products or services, shifting demographic composition and their consumer preferences, etc.
Therefore, to achieve this objective, managers have to make choices in decision-making, which is the process of selecting a course of action from two or more alternatives (Weihrich & Koontz; 1994, 199). A sound decision making requires extensive knowledge of economic theory and the tools of economic analysis, that are directly related in the process of decision-making. Since managerial economics is concerned with such economic theories and tools of analysis, it is very relevant to the managerial decision-making process.