Question

1. Here is another chance to be creative. Describe a situation where asymmetric information can be applied to a non-economic situation that has not already been used as an example in this course. {For example, I am a big fan of the New York Mets baseball team. In July of this year, the Mets were trying to trade one of their starting pitchers, Zach Wheeler. Wheeler was pitching very well but has a long history of injuries (he had missed the entire 2015 and 2016 baseball seasons due to injuries and injuries cut short his 2017 season as well). Based on his performance at the time, the Mets valued him as a top notch starting pitcher and wanted a significant return in a trade. However, the other teams were not willing to give up the type of talent they normally would for a top notch starting pitcher because they were leery of his ability to stay healthy. For this reason, no trade was made. This is an illustration of the Market for Lemons. The Mets should have tried to structure a trade where the return would be a player to be named later. If Wheeler remained healthy for the rest of the season, they would get a really good player. If Wheeler broke down after the trade, they would get only a mediocre player as the player to be named later.}
   1. Describe the situation in detail.
   2. Describe what the asymmetric information was. In my example, it was the likelihood of Wheeler staying healthy that was the unknown.
   3. Is your situation an example of Moral Hazard, Adverse Selection, or Market for Lemons? {You may also use an example of cherry picking.}
   4. What solution was used or what solution could you have recommended?

Answer 1

Answer (a) Above situation was trading of players for profit motive but probelm of asymmetric information occured where Mets have no information about wheeler's medical history. But wheeler was considered to be lemon for Mets , if he yield negative returns in future. Moral hazard was not to reveal medical history by wheeler to Mets. Indication was reflected when other players show negative attitude towards ranking of wheeler as top notch player due to bad health of wheeler.

Answer (b) Asymmetric information was medical history of Zack Wheeler that was not showed to Mets so as to verify its health condition. Asymmetric information lead to moral hazard and market of lemon and may result in negative returns.

Answer (c) Above situation was situation of market of lemon as if Wheeler would not perform upto that efficiency.

Above situation might act as market of picking up cherry if other player might show his medical history that would reflect healthy record. That would pose example of cherry.

Answer (d) For selection of Cherry in the market , it is suggested to use market signalling that is there should be compulsory of submission of health records of medical history by players which could reduce probelm of moral hazards and asymmetric information. It would lead to selection of cherry and avoid selection of lemons from the market.

Hence Concluded that probelms of asymmetric information and moral hazards can be reduced by using market signalling in which such conditions should be made which could lead to proper information.

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