Information asymmetry

In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This asymmetry creates an imbalance of power in transactions, which can sometimes cause the transactions to go away, a kind of market failure in the worst case. Examples of this problem are adverse selection, moral hazard, and monopolies of knowledge. In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This asymmetry creates an imbalance of power in transactions, which can sometimes cause the transactions to go away, a kind of market failure in the worst case. Examples of this problem are adverse selection, moral hazard, and monopolies of knowledge. Information asymmetry extends to non-economic behavior. As private firms have better information than regulators about the actions that they would take in the absence of a regulation, the effectiveness of a regulation may be undermined. International relations theory has recognized that wars may be caused by asymmetric information and that 'Most of the great wars of the modern era resulted from leaders miscalculating their prospects for victory'. There is asymmetric information between national leaders, wrote Jackson and Morelli, when there are differences 'in what they know about each other's armaments, quality of military personnel and tactics, determination, geography, political climate, or even just about the relative probability of different outcomes' or where they have 'incomplete information about the motivations of other agents'. Information asymmetries are studied in the context of principal–agent problems where they are a major cause of misinforming and is essential in every communication process. Information asymmetry is in contrast to perfect information, which is a key assumption in neo-classical economics. In 2001 the Nobel Memorial Prize in Economics was awarded to George Akerlof, Michael Spence, and Joseph E. Stiglitz for their 'analyses of markets with asymmetric information'.