Question

Identify an example of a management scenario from your own experiences or current events involving adverse selection or moral hazard. Describe some methods to correct the potential problems of the asymmetric information.

Your journal entry must be at least 200 words in length. No references or citations are necessary.

Answer 1

while decision making and transactions carried on if one party has some or better information than other party then this is known Asymmetric information. This results in power imbalances. Asymmetric information can lead to various problems which needs to be overcomed.some methods to deal with the problems of asymmetric information are:
1) provide proper signals to customers while investing in a business.this proper signalling will have a positive effect at the customers ensuring that the owner have an intention of a long term business.
2)one must give proper warranties on the product sold on its reliability and sustainability.
3) the party must own proper mechanics or worker who would assist or solve in case if any discrepancies faced by the customers.
4) generally bonuses do not have a scope to be claimed.
5) liabilities in different terms like legal or insurance facilities or services of rent and other obligations to be undertaken in order to prevent moral hazards.
6) clear concepts about the materials used in the product, conditions of the commodity and other related details about the commodity to be clearly ventilated in details to the customers.
7) administrative cost,maintance cost,value cost to be kept in control so that it does not become a burden customers.