Example: Providing benefits in cash may encourage people to pretend to have physical disabilities, providing benefits in kind (such as wheelchairs) may solve this problem.
Reference: Joseph Stiglitz: the insurance market problem.
Reference: George Akerlof: the car market for lemons, demonstrating that asymmetric information can lead to market failures - in the example selling cars becomes more attractive to the owners of bad cars.
Insight: In-kind benefits can serve as screening devices against asymmetric information.
Insight: Contracts can create incentives for parties to reveal information.
Insight: Information asymmetries in the insurance market drive the cost of insurance higher and higher, such that people at lower risk have less incentive to buy relatively expensive policies, whereas people at greater risk have a larger incentive to buy larger policies.
Example: The seller of used cars knows more about the car than the buyer.
Example: Under communism there were no brands of bread, so no bread makers had an incentive to make good bread and be rewarded with repeat custom because the customers did not know where the bread came from. So the bread was bad.
Insight: Advertising is a form of signalling of quality (why spend big of advertisements unless the product is good).
Reference: George Akerlof 1970 paper 'The Market For Lemons'.
Insight: The stereotype of selling is that it relies on information asymmetry (deception). The goal for sales is for the consumer to understand the benefits and value of a product, and communicate the value to other potential customers.
Insight: Information asymmetry can be the source of problems in an organisation.
Example: Increasingly, external stakeholders [such as shareholders, investors, and communities] play a key role in organisational success. However, there is information asymmetry between internal and external stakeholders about management, performance, and operations etc. Information asymmetry makes clear and fair contracting and reporting important in the relationship between organisations and internal and external stakeholders.
Insight: Asymmetric information plays a role in stock market bubbles - insiders become concerned with bubble companies and exploit this information fraudulently.
Example: Plants signalling through flowers or scent - what they 'advertise' might be different from what they offer - unknown to the animal pollinator. It may be a trap.
IV. Summary of Key Insights & Principles
Business
Information asymmetries can lead to market failures or significant organisational problems.
The party with less information may be greatly disadvantaged and have poorer decision making capabilities.
Information asymmetry can lead to moral hazards - where one party has an incentive to 'cheat' or act irresponsibly.
Design contracts that provide both parties with incentives to reveal information or reduce asymmetric information.
