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:
“We hear a great deal of lamentation these days about writers having all taken themselves to the colleges and universities where they live decorously instead of going out and getting firsthand information about life. The fact is that anybody who has survived his childhood has enough information about life to last him the rest of his days.”
—Flannery O’Connor (1925–1964)