Principles of Microeconomics / Unit 15 MIC 1404 worked example, 60 to 90 seconds
Which Mechanism Fits
The idea
Given an information problem, name who knows more, what they could hide, and the mechanism that makes hiding costly or reveals the truth. A seller who knows the flaws is answered by a guarantee or warranty, which costs the seller if the flaw appears. A worker who knows their own reliability is answered by verifiable screens and a probation that reveals it. A borrower who knows their intent is answered by a credit check, a cosigner or collateral, shifting the loss onto someone who knows them.
In practice
Worked example, four cases. A used car sold by a stranger: the seller knows the faults; a dealer's warranty or a reputation for repeat business makes hiding them expensive. A new hire: the applicant knows their own work habits; transcripts and references screen, a work sample signals, and probation reveals. A small loan to a first-time borrower: the borrower knows whether they intend to repay; a cosigner who knows them, or collateral the lender can seize, answers it. A mail-order purchase: the buyer cannot inspect; a money-back guarantee lets the buyer inspect after paying.
Where people slip
Every mechanism costs something, so thin markets do not become thick for free; the price of a warranted car includes the warranty. And a signal works only if it is harder to fake than to earn; a credential anyone can buy signals nothing.
Your place on the trail
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Builds on
Unlocks
- Nothing yet depends on this.
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