Information Asymmetry

In economics and contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. In contrast to neo-classical economics which assumes perfect information, this is about "What We Don't Know". This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry, a kind of market failure in the worst case. Examples of this problem are adverse selection, moral hazard, and information monopoly. Most commonly, information asymmetries are studied in the context of principal–agent problems. Information asymmetry causes misinforming and is essential in every communication process.

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."