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Handbook of the Economics of Risk and Uncertainty
book

Handbook of the Economics of Risk and Uncertainty

by Mark Machina, W. Kip Viscusi
November 2013
Beginner content levelBeginner
896 pages
35h 10m
English
North Holland
Content preview from Handbook of the Economics of Risk and Uncertainty
Uncertainty and Imperfect Information in Markets
321
only and it will exist (the seller promises to fix any problem she diagnoses as L at price
L
).
The remaining case when
¯
p
<
c
H
is
efficiency dictates that only the more severe problem be treated. The previous logic
continues to apply: for the seller to have an incentive to make an honest diagnosis,
m
L
m
H
. Here, given no market for fixing less severe problems, m
L
= 0; hence, effi-
ciency is achievable only if p
H
= c
H
. In other words, in this case, the seller announces
she won’t fix L problems, but will fix H problems at cost, c
H
. In this case, the incentive
problem is so severe that it results in ...
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Publisher Resources

ISBN: 9780444536853