Suppliers of high-quality goods and services can overcome adverse selection problems through a variety of strategies such as warranties, attainment of educational credentials, or licensing. Such strategies are known as
a. incentive systems
b. reputational effects
c. anti-lemon strategies
d. market signaling strategies
e. inefficient credibility expenditures
1) Asymmetric information
An employer seeking to structure employee incentive systems in such a manner as to induce optimal work effort from employees whose actions cannot be perfectly observed must
a. Avoid situations that generate a “separating” equilibrium by making sure that incentive systems send the proper market signals to employees.
b. Structure incentive systems that satisfy a “participation” constraint and an “incentive compatibility” constraint.
c. Prevent moral hazard by educating all employees about the “incentive compatibility” features of their compensation plan.
d. Hire only workers whose marginal productivity is above average. e. Carefully check all employee credentials prior to hiring them.