Asymmetric Information

Causes of Asymmetric Information

There are a number of factors that can lead to asymmetric information, including:

• Hidden information: One party may have information that the other party cannot observe, such as their private preferences or their knowledge of the quality of a product.
• Hidden action: One party may be able to take actions that the other party cannot observe, such as shirking on their responsibilities or misrepresenting their intentions.
• Information asymmetry can lead to several problems, including:
• Adverse selection: This occurs when one party to a transaction has more information than the other party and uses this information to select themselves into the transaction in a way that is beneficial to them but harmful to the other party.
• Moral hazard: This occurs when one party to a transaction has more information than the other party and uses this information to take actions that are beneficial to them but harmful to the other party.

Examples of Asymmetric Information

There are many examples of asymmetric information in the real world, including: