Dealing With Imperfect Information

There have been a number of things that have been suggested to help combat informational asymmetries. Some have suggested government regulation of a market while others have suggested government licensing. The Federal Trade Commission (FTC), the Consumer Product Safety Commission (CPSC), the Occupational Safety and Health Administration (OSHA), and the Food and Drug Administration (FDA) are examples of federal regulation to ease informational disparities. Government licensing of doctors and lawyers is an example of state licensing to diminish information asymmetry.

In our health insurance example where the buyer has better information than seller, one possible way to decrease the informational asymmetry is for the insurance company to establish a separating equilibrium. Here, insurance companies will offer different amounts of insurance at different price points. Buyers will reveal how healthy they are by purchasing the insurance policy that fits their personal health characteristics. For example, the healthy person who has a low probability of needing expensive medical attention will purchase the least expensive plan with minimal coverage. On the other hand, the person with a lot of health problems will purchase the plan with more coverage anticipating that he of she will likely need the more expensive coverage.

Another technique insurance providers can use is called experience rating. Under this method, insurance underwriters establish premiums based on realized events. For example, a policy holder with several visits to an expensive X-Ray machine will be charged more for his or her insurance. This is also common in the auto insurance market were speeding tickets and auto accidents increase individuals insurance payments.

Some have suggested that informational problems are tied to a lack of market; information its self has economic value. For example, the buyer of a used car can ease his informational disadvantage by purchasing the services of a mechanic to look over a car before purchasing. Further, there are companies such as CARFAX that specialize in the trade of information on the history of used cars. Also, and not limited to only the used car market, there are many private publishing companies that conduct product testings; the magazine Consumer Reports, published by Consumer Union, is an example on one of these sources of information.

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