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DEFINITION of 'Asymmetric Information'
A situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Potentially, this could be a harmful situation because one party can take advantage of the other party's lack of knowledge.
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BREAKING DOWN 'Asymmetric Information'
With increased advancements in technology, asymmetric information has been on the decline as a result of more and more people being able to easily access all types of information.
Information Asymmetry can lead to two main problems:
1. Adverse selection- immoral behavior that takes advantage of asymmetric information before a transaction. For example, a person who is not be in optimal health may be more inclined to purchase life insurance than someone who feels fine.
2. Moral Hazard- immoral behavior that takes advantage of asymmetric information after a transaction. For example, if someone has fire insurance they may be more likely to commit arson to reap the benefits of the insurance.
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RELATED FAQS
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How can I profit from monitoring open interest?
Since markets experience asymmetric information between parties, monitor whether there is an imbalance between the open interest ... Read Full Answer >> -
Why is moral hazard so prevalent in the financial services industry?
Moral hazard tends to be prevalent in the financial services industry due to the nature of the industry, temptation and greed, ... Read Full Answer >> -
How do financial market exhibit asymmetric information?
Financial markets exhibit asymmetric information in that in a financial transaction, one of the two parties involved will ... Read Full Answer >> -
What are the most effective ways to reduce moral hazard?
There are a number of ways to reduce moral hazard, including the offering of incentives, policies to prevent immoral behavior ... Read Full Answer >> -
What is the difference between moral hazard and adverse selection?
Adverse selection occurs when there's a lack of symmetric information prior to a deal between a buyer and a seller, whereas ... Read Full Answer >> -
What is the theory of asymmetric information in economics?
The theory of asymmetric information was developed in the 1970s and 1980s as a plausible explanation for common phenomena ... Read Full Answer >> -
How significant is asymmetric information risk?
Asymmetric information risk is ever present in financial markets and can represent a very significant factor. Asymmetric ... Read Full Answer >> -
How do notaries reduce asymmetric information risk?
A notary acts as an intermediary who can help mitigate the problems caused by asymmetric information in economic transactions. ... Read Full Answer >> -
What is the difference between adverse selection and moral hazard?
In economics, moral hazard and adverse selection are two possible consequences of asymmetric information or ineffective information ... Read Full Answer >> -
How does adverse selection affect insurance premiums?
Any limits on an insurance provider's ability to appropriately price risk – to economize on important information – might ... Read Full Answer >> -
How do modern corporations deal with agency problems?
Agency problems – also known as principal-agent problems or asymmetric information-driven conflicts of interest – are inherent ... Read Full Answer >>