Economics - Asymmetric Information

Asymmetric information

A situation where on party possessed more or better information than the other party when making am economic transaction

Opportunistic behaviour

One party can take advantage of the opportunity that the other party lacks information:

 

-         Adverse selection

Moral hazard

Adverse Selection

The party with more in info takes advantage of the imbalance of information before a contract is written or a transaction occurs

Moral Hazard

One party changes their behaviour as they become incentivized to take risks, knowing they are insured against the costs involved

Provision of information

Reduces asymmetric info by providing additional info about goods/services, or requites firms to do so

Signalling

When the seller (the party with more information) tries to convince buyers that its products are of good quality

Screening

When the party with limited info tries to gain more information about the other party