ECO: Asymmetric Information

Information Asymmetry

When difference in knowledge is relevant to an interaction

Hidden Action

Actions taken by one side of the economic relationship that the other side cannot observe

Hidden Characteristic

Things that one side of a transaction knows about itself that the other side does not

Moral Hazard

When a particular party has incentive to take on risks because they do not bear the costs of such risky actions

Agent

A person who performs an action for the principal

Principal

The person on whose behalf and subject to whose control an agent acts

Adverse Selection

When one party in a transaction knows more about the attributes of the item being exchanged than the other

Signaling

An action taken by an informed party to reveal private information to an uninformed party

Screening

An action taken by an uninformed party to reveal information to the informed party