Information Asymmetry
Information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance in power in transactions which can sometimes cause the transactions to go awry. Examples of this problem are adverse selection and moral hazard.
A classic paper on adverse selection is George Akerlof's The Market for Lemons. There are two primary solutions to this problem, signalling and screening.
For moral hazard, contracting between principal and agent may be describable as a second best solution where payoffs alone are observable with information asymmmetry.
Read more about this topic: Information Economics
Famous quotes containing the word information:
“Phenomenal nature shadows him wherever he goes. Clouds in the staring sky transmit to one another, by means of slow signs, incredibly detailed information regarding him. His inmost thoughts are discussed at nightfall, in manual alphabet, by darkly gesticulating trees. Pebbles or stains or sunflecks form patterns representing in some awful way messages which he must intercept. Everything is a cipher and of everything he is the theme.”
—Vladimir Nabokov (1899–1977)