Information asymmetry

Extracted Attributes

• Primary Fields

  Economics, Contract Theory, Mechanism Design, International Relations

• Common Examples

  Used car sales (lemons), Health insurance, Insider trading

• Impact on Markets

  Market failure, Inefficiency, Power shift to the informed party

• Core Manifestations

  Adverse selection, Moral hazard, Monopolies of knowledge

• Theoretical Opposite

  Perfect information

Timeline

• Michael Spence introduces Signaling Theory as a method to bridge information gaps. (Source: ScienceDirect)

  1973-01-01

• James A. Mirrlees and William Vickrey are awarded the Nobel Memorial Prize in Economics for contributions to the theory of incentives under asymmetric information. (Source: Wikipedia)

  1996-10-08

• George Akerlof, Michael Spence, and Joseph E. Stiglitz receive the Nobel Prize for their analyses of markets with asymmetric information. (Source: Wikipedia)

  2001-10-10

• Leonid Hurwicz, Eric Maskin, and Roger Myerson are awarded the Nobel Prize for laying the foundations of mechanism design theory. (Source: Wikipedia)

  2007-10-15

• A study by Schmidt and Keil highlights how private information asymmetry within firms influences business activities and competitive advantage. (Source: Wikipedia)

  2013-01-01

Information asymmetry

In contract theory, mechanism design, and economics, an information asymmetry is a situation where one party has more or better information than the other. Information asymmetry creates an imbalance of power in transactions, which can sometimes cause the transactions to be inefficient, causing market failure in the worst case. Examples of this problem are adverse selection, moral hazard, and monopolies of knowledge. A common way to visualise information asymmetry is with a scale, with one side being the seller and the other the buyer. When the seller has more or better information, the transaction will more likely occur in the seller's favour ("the balance of power has shifted to the seller"). An example of this could be when a used car is sold, the seller is likely to have a much better understanding of the car's condition and hence its market value than the buyer, who can only estimate the market value based on the information provided by the seller and their own assessment of the vehicle. The balance of power can, however, also be in the hands of the buyer. When buying health insurance, the buyer is not always required to provide full details of future health risks. By not providing this information to the insurance company, the buyer will pay the same premium as someone much less likely to require a payout in the future. The adjacent image illustrates the balance of power between two agents when there is perfect information. Perfect information means that all parties have complete knowledge. If the buyer has more information, the power to manipulate the transaction will be represented by the scale leaning towards the buyer's side. Information asymmetry extends to non-economic behaviour. Private firms have better information than regulators about the actions that they would take in the absence of regulation, and the effectiveness of a regulation may be undermined. International relations theory has recognized that wars may be caused by asymmetric information and that "Most of the great wars of the modern era resulted from leaders miscalculating their prospects for victory". Jackson and Morelli wrote that there is asymmetric information between national leaders, when there are differences "in what they know [i.e. believe] about each other's armaments, quality of military personnel and tactics, determination, geography, political climate, or even just about the relative probability of different outcomes" or where they have "incomplete information about the motivations of other agents". Information asymmetries are studied in the context of principal–agent problems where they are a major cause of misinforming and is essential in every communication process. Information asymmetry is in contrast to perfect information, which is a key assumption in neo-classical economics. In 1996, a Nobel Memorial Prize in Economics was awarded to James A. Mirrlees and William Vickrey for their "fundamental contributions to the economic theory of incentives under asymmetric information". This led the Nobel Committee to acknowledge the importance of information problems in economics. They later awarded another Nobel Prize in 2001 to George Akerlof, Michael Spence, and Joseph E. Stiglitz for their "analyses of markets with asymmetric information". The 2007 Nobel Memorial Prize in Economic Sciences was awarded to Leonid Hurwicz, Eric Maskin, and Roger Myerson "for having laid the foundations of mechanism design theory", a field dealing with designing markets that encourage participants to honestly reveal their information.

Web Search Results

• Information asymmetry | Social Sciences and Humanities - EBSCO

  Information asymmetry is an economic phenomenon where one party in a transaction possesses more information than the other, potentially leading to an imbalance in decision-making. A classic example is the used-car market, in which sellers have a clearer understanding of the vehicle's condition compared to buyers, who may risk purchasing a faulty car, known as a "lemon." This situation can lead to adverse selection, where buyers are unable to distinguish between high- and low-quality vehicles, resulting in a market dominated by lower-quality products. Information asymmetry is also prevalent in health insurance, where applicants typically know more about their health than insurance companies, which can lead to issues like moral hazard, where insured individuals might engage in riskier [...] Information asymmetry refers to an economic event in which one party has more information about an economic transaction than the other party. A famous example of asymmetric information is buying and selling used cars, as the person selling the car has much more information about the car than the person buying it, raising the possibility that a seller could take advantage of a customer's ignorance and sell them a broken or flawed car, known as a "lemon." Governments put laws into place, including laws referred to as "lemon laws," to reduce the number of economic transactions that involve information asymmetry. Information asymmetry, if left unchecked, can have negative consequences on a particular market. For example, when people purchase health insurance, they take part in an economic [...] ## Overview Information asymmetry happens when one party has more information about a transaction than another party, and one party might make a different decision in the transaction if that person had all the information. Transactions that include a buyer and a seller are the most common types of transactions that have asymmetric information.

• Information asymmetry - Wikipedia

  Information asymmetry occurs in situations where some parties have more information regarding an issue than others. It is considered a major cause of market failure. The contribution of information asymmetry to market failure arises from the fact that it impairs with the free hand which is expected to guide how modern markets work. For example, the stock market forms a major avenue through which publicly traded entities can raise their capital. The operation of stock markets across the world, is carried in a way that ensures current and potential investors have the same level of information about the stocks or any other securities that may be listed in that market. That level of information symmetry helps to ensure similar conditions to all parties in the market, which in turn helps to [...] Information asymmetry has been applied in a variety of ways in management research ranging from conceptualizations of information asymmetry to building resolutions to reduce it. Studies have shown that information asymmetry can be a source of competitive advantage for the firms. A 2013 study by Schmidt and Keil has revealed that the presence of private information asymmetry within firms influences normal business activities. Firms that have a more concrete understanding of their resources can use this information to gauge their advantage over competitors. In Ozeml, Reuer and Gulati's 2013 study, they found that 'different information' was an additional source of information asymmetry in venture capitalist and alliance networks; when different team members bring diverse, specialized [...] A substantial portion of research in the field of accounting can be framed in terms of information asymmetry, since accounting involves the transmission of an enterprise's information from those who have it to those who need it for decision-making. Bartov and Bodnar (1996) mentioned that the different accounting methods used by enterprises can lead to information asymmetry. For instance aggressively recognising revenue can result in preparers of financial statements having a much better understanding of the levels of future revenue then those reading the statements. Likewise, in finance literature, the acknowledgment of information asymmetry between organizations challenged the Modigliani–Miller theorem, which states that the valuation of a firm is unaffected by its financial structure.

• What Is Asymmetric Information - How Does It Impact Your IT?

  The term “information asymmetry” is rooted in economic theory. It describes a scenario in which one party in a transaction has more or better information than the other, leading to imbalances in market predictions, inefficient operations and skewed decisions. When key stakeholders such as IT teams, security professionals, or management lack equal access to organizational visibility, they may struggle to optimize infrastructure, manage risks or plan future investments effectively. This imbalance can have profound implications for analytics and generative artificial intelligence (AI) strategies and can negatively impact critical IT domains, including service-level agreements (SLAs), cloud cost management, IT purchasing and security. [...] RELATED: Bridge information gaps with CDW’s technology support services. ## What Is Asymmetric Information? Experts Explain Forrester principal analyst Christopher Gilchrist describes information asymmetry as a “fundamental issue” that can significantly impact the IT landscape. “This imbalance often occurs between vendors and customers, IT teams and business leaders, or even within internal departments,” he says. When one side lacks a full understanding of the technical, financial and operational details of a system or service, it can lead to poor decision-making and inaccurate assessments. “For example, IT teams might overpay for services or adopt solutions that fail to meet the organization’s needs because they lack critical insights,” Gilchrist says. [...] Addressing information asymmetry is critical in ensuring fairness, efficiency and trust in economic and organizational relationships. To bridge the gap between parties with unequal access to information, IT leaders should work to create transparency, align incentives and minimize risk. According to Gilchrist, one-way organizations can prioritize transparency is to demand clarity from their vendors. Another is to partner with third-party experts who can identify these issues early on. “Whether through robust training programs, third-party audits, or real-time compliance tools, organizations can bridge these information gaps and make more informed, strategic decisions in an increasingly complex IT environment,” he says.

• Information Asymmetry - an overview | ScienceDirect Topics

  On the ground of the theory of signaling (Spence, 1973) startups that deliver positive information about their company to potential investors using credible and effective signals should perform better in terms of fundraising (Connelly et al., 2011). Information asymmetry is the main foundation of signaling theory (Stiglitz, 2002) with information quality and intent as the most important key elements (Yasar et al., 2020). Investors in equity crowdfunding platforms collect information mostly from the platform and information asymmetry is higher than face-to-face data retrieval from founders. This puts them at a disadvantage when they are conducting due diligence to assess startups’ financial risk and return potential. In this respect, in equity crowdfunding platforms information asymmetry [...] ### Other Sources of Market Failure Additional market failures exist. The term ‘information asymmetry’ is sometimes used to describe a mechanism very similar to the knowledge spillover mechanism described above to explain the low adoption of energy-efficient end-use devices and behaviors. Consumers may not have access to information about the benefits and risks of adopting a new, energy-efficient technology. Early adopters may reveal information about these characteristics, for example, convenience or reliability. They may also discover ways to use devices that improve performance, a process sometimes called learning by using. Early adopters thus create positive externalities for those who observe them. [...] Companies may seek to communicate their environmental performance to outside stakeholders, but may not always find this easy to do since they may lack full knowledge of the products, processes, and materials flowing through their supply chains. Typically, suppliers may hold more information about their environmental performance and the performance impact is to be experienced by the customers. This situation is defined as an information asymmetry. A major advantage of greening supply chains is derived from the capability to market and sell green products. Such capability potentially develops new products and hence builds competitive advantages for enterprises. Yet, companies may not be able to reap this image benefit due to the information asymmetry arising from consumers' inability to

• Information Asymmetry Explained (With Examples) - MasterClass

  Image 345Image 346 Image 347: Ryan Holiday Ryan Holiday with Noted Experts Image 348Image 349 Image 350: Neil deGrasse Tyson Teaches Scientific Thinking and Communication Get SaveShare on your network Jump To Section What Is Information Asymmetry? A Brief History of Information Asymmetry How Does Information Asymmetry Affect Business? 3 Examples of Information Asymmetry Learn More Chris Voss Teaches The Art of Negotiation What Is Information Asymmetry? Information asymmetry is a condition under which one business party possesses more information than the other party they are dealing with. One party’s access to more relevant and up-to-date information can result in business imbalances and even exploitation. Meet One of Your New Instructors Get Image 351 [...] Last updated: Nov 2, 2021 • 3 min read When two partners in a business transaction have access to the same relevant information, their business relationship is completely symmetrical. In many transactions, however, one party has access to more information or better information than the other party, which results in a phenomenon known as information asymmetry. Image 1Image 2 Learn From the Best Acting & Performing Arts category Art & Design category Business & Entrepreneurship category Community & Government category Film & TV category Food & Drink category Games & Digital Media category Health & Wellness category Music category Outdoor Adventures & Events category Science & Technology category Sports & Athletics category Writing category [...] Adverse selection: Adverse selection refers to a business relationship where the buyer and seller have access to different information (although one information set is not necessarily superior to the other). Each party may make moves based on knowledge they presume they have but the other does not. Such information asymmetry can affect retail markets and labor markets alike. It can even affect personal relationships.