Alright. So now let's discuss some of the solutions to informational problems like adverse selection and moral hazard. So the first solution is signaling, we might have mentioned signaling before in another video, but let's go over it again here. So signaling, it's going to be an action by the informed party. So the informed party is going to try and reveal their private information. They informed party has some private information and they're gonna try and reveal it to the uninformed party. Okay to try and get rid of this information. Asymmetry. Right? When we don't have the same information, it makes it a little tougher to do the transaction. So let's see how signaling can solve some of our problems here. So let's go back to that used car sale. The informed party in this case was the salesman, right? The salesman knew about the condition of the car. And when you walked in to buy the car, you didn't know that same information, right? You, you didn't know if it was gonna be a good car or not. But what can the salesman do to signal to you that it's a good car? Well, they can provide a warranty if the salesman provides a warranty on the used car. Well, now you're gonna feel a little more comfortable purchasing it, right? Because if something is wrong with the car, if it ends up being a lemon, well, you can bring it in and they'll repair it. They'll replace it, right? You have this warranty, uh, protecting you from a lemon. And this signals from the salesman too as well. Because if the salesman truly has a good car, they're gonna want to provide a warranty, right? Because if it's a good car, they're not going to have to replace anything. They're not gonna have to repair the car on on the warranty because it's a good car. So the salesman knowing they have a good car can signal to the purchaser by offering this warranty. Okay. So the signal is the warranty that this is a good car. How about on a job application? Let's think about a job application. So the informed party in this case, when you apply for a job, they don't really know much about you. You're showing up, You just show up to the job. Hey, I can, I can make pizzas. Right? Well the informed party is the applicant right? The job applicant is going to be our informed party because they know more about themselves, how hard working they are, right? How good they are at their job. Um And their secret is how good they are, right? And their secret might be that hey, I'm I'm smart I'm a smart person. And how do we signal to employers that were smart while we signal maybe with a college degree right? By having a college degree on a resume. It signals to them hey, they were able to get through college. They got a good degree. So they are probably smart. This college degree acts as a signal to the employer who doesn't know much about you were signaling to him how smart you are. Okay, So there's how signals can can help relieve the problems of information. Asymmetry. Alright, let's pause here and then we'll continue with screening.

Alright, another way we can solve information. Asymmetry problems is with screening. So this is an action by the uninformed party to induce the informed party to reveal their information, right? So, notice the difference here between screening and signaling, signaling up here was where the informed party is trying to reveal their information. So they're the ones taking the action in screening. It's the uninformed party taking the action right there trying to get the informed party to reveal some of their private information. So let's start here with health insurance. In this case, the uninformed party is the insurer, right? They don't know how healthy you are. The secret is the riskiness of the policyholders, right? How, how many health problems they have that they don't that they didn't tell the insurance company. So how can they screen uh these risky policyholders? Well, they can offer a deductible plan. So what does this deductible plan do? A deductible? That's where you have to pay an out of pocket cost. Right? You you pay these premiums month for your health insurance. You might have to pay 100 $200 300 dollars a month to have health insurance. But then if something really bad happens, you have the deductible, the deductible, say it could be $5000. And you'll have to pay, let's say you break your leg, You would have to pay the 1st $5,000 and the insurance would cover the rest of it, right? So this deductible. It's going to screen out the risky people, right? Because the risky people don't want to pay this big out of pocket cost, and they expect to use the insurance more. Right? They're expecting risky things to happen. They have health problems, they're expecting to use the insurance more. So by having this high deductible. Well, they're gonna essentially screen themselves out. So, let's see two different plans here. Plan one could be a plan with a low premium and a high deductible. Right? And plan to could be the opposite where we have a higher premium and a low deductible. Okay, So, think about that deductible, right? If we go and have an injury or something that takes us to the hospital, we're gonna have to pay this huge out of pocket amount, right? And risky people would expect to have to pay that deductible, right? Because they're going to the hospital that they're expecting to go to the hospital, then they would expect to pay the deductible. So they don't want that. They would rather have a low deductible when they're risky because they don't want to have those out of pocket costs. So, what's gonna happen is that this bottom plan is going to attract the risky people and this top plan will will attract the non risky people, right? Because they have the lower premium. So they still want to be covered, but they're not expecting to have to pay this deductible. Maybe they're gonna use the doctor's appointment here and there, But they're not expecting a big, catastrophic kind of spending of money here. All right, So, this is how can happen right now, the uninformed party, the health insurance company was able to screen the patients. They were able to break them up into two groups and have the riskier group have plan to in this case, Right? So, they were able to screen and get private information based on how they chose, how the people buying the insurance chose which plan they wanted to buy. Right now, let's do the employer employee relationship. So, we talked about this one a little bit too. Where the uninformed party is gonna be the employer, the employer doesn't know um how hard you're working, right? They don't know whether or not you are slacking off. And just so, you know, another word that they love to use for slacking off in economics. For some reason, they use the word shirking, shirking is the same thing as slacking off. It's just the word they like to use. So, you might see that on the test shirking. What is that? That's just slacking off. So, how can an employer screen these these uh slacking employees? Well, the first thing they could do is offer commission based pay. So, if we think about a sales position, let's think about a sales job. If we offered a salesman a fixed amount of salary, right? They were gonna get a fixed amount, let's say $50,000 a year, no matter how many sales they made. Well, they wouldn't really be incentivized to really push out sales, right? So, since they're gonna make the same amount anyways, they might just slack off, right? They're gonna be shirking. So, by offering commission based pay, well, then they have the incentive to work harder, make a lot of sales to increase their commissions. Another way they can do it is with year end bonuses with year end bonuses. Well, in this case, they're basically, in essence withholding some of the payment to the employee right? By having this year end bonus. They're basically dangling this carrot in front of the employee saying, hey, if you work hard, you're going to get this extra money, right? So, now the employee has the incentive to work harder and basically to not shirk right? So, they're screening away these shirking employees by offering commission based pay or year end bonuses, right? With commission. You would imagine that a slacking off kind of employee wouldn't want a commission based pay. They'd rather settle for some kind of fixed pay so that they don't have to work as hard. So, this commission based pay is going to get those aggressive salesman that want to work hard and will not be shirking. Cool. So, the screening, it helps the uninformed party get information out of the informed party. Alright, So, that's some ways that we can help solve our informational problems, adverse selection and moral hazard is through signaling and screening. All right. Let's go ahead and move on to the next video.