information asymmetry

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Asymmetry of information is when one party has greater knowledge, or ability to gain or shield information, from another party (Roberts, 2004, p 82). Examples of information asymmetry are as follows --

  • In the context of an offering, such as a used car, the seller has far greater knowledge of the car than the buyer. Unless the seller is fully trusted to reveal all he knows about the car, the seller will offer less for the car than it may actually be worth, because they are allowing for undisclosed defects and shortcomings.
  • In the context of a contractual agreement, there are limitations on the ability to observe the actions of others, thus limiting the nature and degree of agreements that ma be reached.