Week 7 Discussion 

Context

Asymmetric information and/or imperfect information can cause two forms of market failure: 1) adverse selection and 2) moral hazard. Asymmetric information is where one party in the transaction has more information than the other party in the transaction. Imperfect information is a situation in which neither party has perfect information about the good/service being exchanged in a transaction. Such goods and services are sometime referred to as "experience goods."

In the late 1990s, car leasing was very popular in the United States. A customer would lease a car from the manufacturer for a set term, usually two years, and then have the option of keeping the car. If the customer decided to keep the car, the customer would pay a price to the manufacturer, the “residual value,” computed as 60% of the new car price. The manufacturer would then sell the returned cars at auction. In 1999, the manufacturer lost an average of $480 on each returned car. (The auction price was, on average, $480 less than the residual value.)

Also see the help provided in the discussion preparation.

Instructions

For your discussion post, address the following within the context of the above scenario:

• Why was the manufacturer losing money on this program? Was this a problem of adverse selection or moral hazard?
• What should the manufacturer do to stop losing money? Will rational actors use rules of thumb?

To earn full credit for your discussion, you must complete one post and one follow-up or reply to a classmate. Make sure both the post and the reply focus on the questions asked.

This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course. Check with your professor for any additional instructions.