Perfect Information - Microeconomics

Microeconomics

In microeconomics, a state of perfect information is assumed in some models of perfect competition. That is, assuming that all agents are rational and have perfect information, they will choose the best products, and the market will reward those who make the best products with higher sales. Perfect information would practically mean that all consumers know all things, about all products, at all times (including knowing the probabilistic outcome of all future events), and therefore always make the best decision regarding purchase. This is physically impossible, however, as the Bekenstein Bound provides a physical limit to the amount of information that can be stored in a given physical system (in this case, a market participant). Still, perfect information is a common assumption in economic models because it allows mathematical derivation of desirable results.

The pervasive effects of information asymmetry in markets have been documented and studied in numerous contexts. In his 2001 Nobel Prize lecture, economist Joseph E. Stiglitz spoke to the faults of standard economic models and the faulty policy implications and recommendations that arise from their unrealistic assumptions, writing:

"I only varied one assumption – the assumption concerning perfect information – and in ways which seemed highly plausible. ... We succeeded in showing not only that the standard theory was not robust – changing only one assumption in ways which were totally plausible had drastic consequences, but also that an alternative robust paradigm with great explanatory power could be constructed."