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:
“Computers are good at swift, accurate computation and at storing great masses of information. The brain, on the other hand, is not as efficient a number cruncher and its memory is often highly fallible; a basic inexactness is built into its design. The brain’s strong point is its flexibility. It is unsurpassed at making shrewd guesses and at grasping the total meaning of information presented to it.”
—Jeremy Campbell (b. 1931)