Public Policy Institute of California Essay

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Discuss the asymmetric informational problem that arises in the case of hourly loan officers issuing loans. Propose at least two proposals to minimize these concerns.

One of the primary reasons that so many home loans were issued in recent years to individuals who were not sufficiently creditworthy to be able to make timely payments on those loans is that there was an ongoing condition of asymmetric information. The individuals seeking the loans had much more information than the loan officers; in many cases they knew that they could not reasonably meet the conditions of the loan.

The hourly loan officers in many cases could probably have been able to determine that the individual was unlikely to be able to service the loan. However, these hourly loan officers were being rewarded for making loans and they had no real personal investment in whether or not the loan conditions were honored. They were only the agents of those who were assuming any real risk.

One possible solution for this problem is to make the loan officers' pay directly contingent on whether the mortgage holder continued to make payments for a specific period of time. Another, slightly less drastic tactic, would be to pay loan officers a flat salary so that they would be fairly compensated for their expertise regardless of how many loans they made. This would be the difference between a salesperson in a store selling on commission or being paid a salary: In both cases the person who is paid a flat rate can be assumed to be less affected by short-term gain and could take a longer, more rational view of the process.

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4. There has been much discussion about grade inflation at schools and universities. Discuss and display graphically the impact of grade inflation and the loosening of educational standards. Make sure to discuss how this will affect the ability of education to be used as a signal of worker quality.

One of the reasons that many individuals are focused on getting the best possible education for themselves is that they believe it will lead to a better job for them -- not just because they will have better skills and increased knowledge but also because a sparkling transcript will impress potential employers and give them a leg up in the employment process.

This is a reasonable assumption on the part of students and future employees. However, an essential part of this assumption is that there is a stable and predictable relationship between a student's efforts and abilities and the grades that that individual receives. Both the stability and predictability of this relationship are being deteriorated by grade inflation, in which students have to work less hard and demonstrate lower skills to get the same grades that more talented students once got. The following graph (http://gradeinflation.com/) demonstrates how badly grades and scholastic accomplishment have become unhinged:.....

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