Asymmetric Information

When one party in a situation or market has more information than the other, often leading to poor decision making or market failures.

• The market for used cars - the seller has more information about the car than the buyer.
• The health insurance market - the individual has a greater understanding of their own health than the insurance company.

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Key Insights & Principles

Business

1. Information asymmetries can lead to market failures or significant organisational problems.
2. The party with less information may be greatly disadvantaged and have poorer decision making capabilities.
3. Information asymmetry can lead to moral hazards - where one party has an incentive to 'cheat' or act irresponsibly.

1. Design contracts that provide both parties with incentives to reveal information or reduce asymmetric information.
2. Verify and monitor.
3. Encourage information disclosure.

Book References