Information asymmetry

economics term for when one party in a transaction has an advantage in information

Information asymmetry is a concept in economics and contract theory. It says that in any given contract the two parties of the contract do not have the same information. Information economics is a field of science that looks at some of the problems that result from this bias. Neoclassical economics assumes there is perfect information: all the actors know all the states of their environment; they can also observe what all the other actors do. Information is free -it has no cost in the economic sense. This is also true for the ability to observe the other parties.

ModelEdit

A model called New institutional economics changes this: information is no longer free, there are costs associated with obtaining information.

Information asymmetry is concerned with three main asymmetries:

  • Hidden characteristics: Certain features of the products are not known before the contract is made.
  • Hidden action and hidden information: After the contract is made, one of the actors' actions cannot be observed (hidden action); if it can be observed, its qualities cannot be determined (hidden information)
  • Hidden intention: Before the contract is made, all the actors can be observed, but their intentions cannot be known.

HistoryEdit

In 2001, the Nobel Prize in Economics was awarded to George Akerlof, Michael Spence, and Joseph E. Stiglitz "for their analyses of markets with asymmetric information."[1]

ReferencesEdit