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Tag Archives: game theory

Sex Scandals Create a Problem of Moral Hazard

Asymmetric information creates a moral hazard problem if one party in a transaction cannot observe the (possibly bad) behaviour of the other party. It was moral hazard that caused the sub-prime mortgage meltdown in the U.S. housing market, as those who owned the risky mortgages could not observe the decisions made by mortgage brokers—who were […]

An Economic Theory for Rentboys

Asymmetric information, where one party in a transaction has more accurate information than the other, generally leads to inefficient markets. Formal legal institutions, such as those that make contracts enforceable, reduce the two problems created by asymmetric information: adverse selection and moral hazard. Adverse selection is asymmetric information before a transaction occurs and is a […]

Does Sex Reduce the National Savings Rate?

Rich economies are built on patience. How patient people are to consume determines how much they save. How much they save determines how much they invest and how much they invest influences how quickly economies grow.