The Economist (reference below) defines asymmetric information as somebody knowing more than somebody else.
The Economist goes on to say:
“Such asymmetric information can make it difficult for the two people to do business together, which is why economists, especially those practising game theory, are interested in it. Transactions involving asymmetric (or private) information are everywhere. A government selling broadcasting licences does not know what buyers are prepared to pay for them; a lender does not know how likely a borrower is to repay; a used-car seller knows more about the quality of the car being sold than do potential buyers.
This kind of asymmetry can distort people’s incentives and result in significant inefficiencies.”
Alex Tabarrok (reference below, video on right) explains how asymmetric information could lead to Adverse Selection (when an offer conveys negative information about what is being offered). Markets, such as that for used cars, that are subject to asymmetric information have, over time, developed solutions to mitigate the adverse selection problem, such as:
- Carfax Reports
- certified pre-owned programs that offer guarantees of quality.
From http://www.mruniversity.com/node/318707, accessed 10 May 2016.
- For the following two situations, identify whether the scenario was caused by asymmetric information: Unrest in the Middle East causes oil speculators to buy up oil futures, driving gasoline prices higher.
Atlas topic, subject, and course
The Economist, Asymmetric information, Economics A-Z, at http://www.economist.com/economics-a-to-z/a#node-21529485, accessed 10 May 2016.
Alex Tabarrok, Asymmetric Information and Used Cars (3-minute video), Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/adverse-selection-asymmetric-information-definition, accessed 10 May 2016.
Page created by: Ian Clark, last modified 10 May 2016.
Image: Alex Tabarrok, Minute 1:09 of Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/adverse-selection-asymmetric-information-definition, accessed 10 May 2016.