Information Asymmetry

Information Asymmetry in economics indicates the situation in which one party in a transaction has more or better information than the other. It causes an imbalance in power and can lead to inefficiency in markets. It is a harmful situation in which one party can take the advantage of the lack of other party’s knowledge. The party who hasn’t access to the full information is at a disadvantage and will not be able to make a well thought out decision. It is the opposite of information symmetry. Examples of problems arising due to  information asymmetry are adverse selection, moral hazard and information monopoly.

Adverse Selection: In adverse selection, sellers have more information than buyers about crucial aspects like product quality. It leads to selection of bad products.  The most common example of adverse selection is the insurance industry. Life insurance applicants often withhold or provide false insurance to life insurance companies in order to obtain higher coverage at lower costs. Signaling games and screening games are often used to reduce adverse selection.

Moral Hazard : Moral hazard is the immoral behavior that occurs when one party gets involved in a risky situation being aware of the fact that it is insured against the risk and that the other party will bear the cost incurred due to the risk. An example of this situation is when you don’t install a fire alarm because you have fire insurance.

Information monopoly : Information monopoly occurs when the ruling class maintain their political power through their control of key communications information. Many experts consider the acquisition of Whatsapp by Facebook as a case of information monopoly. According to them, the main motive behind acquiring Whatsapp was not its revenue model but the fact that now Facebook will be able to link millions of people together and , hence make money from them

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