19-1 Bicycle Insurance and Information Asymmetry

Question

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?