Question

Select the 3 correct statements

Select one or more:

a. In the contingent renewal model, when quality cannot be specified by the contract, the principal (buyer of the good) is only constrained by the agent's participation constraint.

b. Although many contracts in the economy are incomplete, this fact does not carry significant economic implications.

c. In the absence of institutional solutions, information asymmetries can potentially produce big market failures, including missing markets.

d. Durable commercial or employer-employee relations can be seen as a way to deal with information asymmetries and incomplete contracts.

e. Warranties and third-party certifications are institutional solutions that can mitigate adverse selection problems.

f. Adverse selection happens when information asymmetries concern an unobserved action.

Answer 1

Ans:

The three correct statements are as follows:

1. In the contingent renewal model, when quality cannot be specified by the contract , the principal (buyer of the good) is only constrained by the agent's participation constraint.

2. In the absence of institutional solutions, information asymmetries can potentially produce big market failures, including missing markets.

3. Adverse selection happens when information asymmetries concern an unobserved action.