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.
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.
- "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2001: Information for the Public", press release from the Royal Swedish Academy of Sciences, Nobel Foundation, nobelprize.org, October 2001; retrieved 2012-4-26.