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:
“I have all my life been on my guard against the information conveyed by the sense of hearing—it being one of my earliest observations, the universal inclination of humankind is to be led by the ears, and I am sometimes apt to imagine that they are given to men as they are to pitchers, purposely that they may be carried about by them.”
—Mary Wortley, Lady Montagu (1689–1762)