Information asymmetry

Common card · No. 260117

In contract theory, mechanism design, and economics, an information asymmetry is a situation where one party has more or better information than the other. Information asymmetry creates an imbalance of power in transactions, which can sometimes cause the transactions to be inefficient, causing market failure in the worst case. Examples of this problem are adverse selection, moral hazard, and monopolies of knowledge. A common analogy used to visualise information asymmetry is the typical weighing scale, wherein one side represents the seller and the other the buyer. When the seller has more or better information, the transaction will more likely occur in the seller's favour (the balance leans to the seller's side). An example of this could be when a used car is sold, in which case the seller is likely to have a much better understanding of the car's condition—and hence its market value—than the buyer, who can only estimate the market value based on the information provided by the seller...

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