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The Problem of Asymmetric Information
There is frequent confusion about the terms asymmetric information, moral hazard and adverse selection? Asymmetric information is the cause, moral hazard and adverse selection are the outcome. This video is great at explaining the connection between asymmetric information and adverse selection. https://www.youtube.com/watch?v=sXPXpJ5vMnU Your job will be to explain what is the adverse selection problem faced by the labor market for police officers.
Many police officer positions require the applicant to have a college degree even though the tasks of a police officer rarely call upon college course material. Why don’t police departments increase their applicant pool by dropping this requirement? What problem is faced by each party in the process of hiring police officers? As you answer this question think back to last week and the problem of Type 1 and 2 errors and the human tendency to be risk-averse.