Advanced Economic Analysis

Advanced Economic Analysis   Order Description   Coursework Brief Using appropriate diagrams, and stating your assumptions clearly, explain the theoretical basis for the view that the phenomenon of adverse selection will arise in a market in which buyers of a good possess inferior information about the quality of unit(s) of the good that each seller is offering for sale. In addition, discuss the extent to which this theoretical prediction has found empirical support. Guidance Notes (i) Although the theoretical model(s) set out in lectures can be used (with appropriately original wording of accompanying explanations) as the basis for part of an answer to this question, good answers will provide coverage of possible theoretical extensions of the basic model. (Examples include heterogeneity of seller subjective valuations of goods of identical quality, systematic differences between buyers in their entirety and sellers in their entirety as regards the value they attach to a good unit of particular quality, and risk- averse market participants. However, modelling of other relevant aspects will also be rewarded if correctly explained.) (ii) In addition to the recommended works referred to below, students are encouraged to search online for relevant academic articles on this topic area. Note that to earn a high mark it is not essential that an intimate acquaintance with the original Akerlof (1970) article (as opposed to a sound understanding of its line of argument) be demonstrated. In addition, answers need not confine their discussion of the empirical evidence to the literature relating to used-car markets. Recommended Reading (i) G. Akerlof (1970), ‘The Market for Lemons: Quality Uncertainty and the Market Mechanism’, Quarterly Journal of Economics 84, pp.488-500. (ii) E. Rasmusen, Games and Information (4th edition, 2007), sec. 9.2. pp.249-255 & 270- 271, or sec.9.2 in the 2nd (1994) or 3rd (2001) editions.. (iii) I. Molho (1997) The Economics of Information chapters 2, 3 & 4, pp.17-59. (iv) D. Genesove (1993), ‘Adverse selection in the wholesale used car market’, Journal of Political Economy 101, pp.644-665 (v) B. Chezum & B. Wimmer (1997) ‘Roses or lemons’, Review of Economics and Statistics 79, pp.521-526. 7 (vi) B. Chezum & B. Wimmer (2000) ‘Evidence of adverse selection from thoroughbred wagering’, Southern Economic Journal pp.700-714. (vii) W. Emons & G. Sheldon (2009), ‘The market for used cars: new evidence of the lemons phenomenon’, Applied Economics 41, pp.2867-2885. Key Marking criteria will include: ? Correctness, validity and appropriateness of economics-related verbal statements and mathematical expressions ? Coherence, validity and completeness of the presented arguments and exposition ? Accuracy, correctness and relevance of diagrams (if included) ? Soundness of discussion of diagrams (if included) ? Originality of content (achieved, for example, by discussion of relevant papers not listed in the recommended reading) ? Overall quality of the assignment