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In economics and contract theory, an information asymmetry is present when one party to a transaction has more or better information than the other party. (This is also called a state of asymmetric information). Most commonly, information asymmetries are studied in the context of principal-agent problems. In 2001, the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel was awarded to George Akerlof, Michael Spence, and Joseph E. Stiglitz "for their analyses of markets with asymmetric information." [1] Image File history File links Broom_icon. ...
Face-to-face trading interactions on the New York Stock Exchange trading floor. ...
Contract theory comprises many different theories and various interpretations of the various body of rules and subrules that define Contract Law. ...
The ASCII codes for the word Wikipedia represented in binary, the numeral system most commonly used for encoding computer information. ...
In economics, the principal-agent problem treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent. ...
Year 2001 (MMI) was a common year starting on Monday (link displays the 2001 Gregorian calendar). ...
The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (in Swedish Sveriges Riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is a prize awarded each year for outstanding intellectual contributions in the field of economics. ...
George Arthur Akerlof (born June 17, 1940) is an American economist and Koshland Professor of Economics at the University of California, Berkeley. ...
Michael Spence (born November 7, 1943) is an American-born, Canadian-raised economist and recipient of the 2001 Nobel Memorial Prize in Economics, along with George A. Akerlof and Joseph E. Stiglitz, for their work on the dynamics of information flows and market development. ...
Joseph Stiglitz (born February 9, 1943) is an American economist and a member of the Columbia University faculty. ...
Information asymmetry models assume that at least one party to a transaction has relevant information whereas the other(s) do not. Some asymmetric information models can also be used in situations where at least one party can enforce, or effectively retaliate for breaches of, certain parts of an agreement whereas the other(s) cannot. In adverse selection models, the ignorant party lacks information while negotiating an agreed understanding of or contract to the transaction, whereas in moral hazard the ignorant party lacks information about performance of the agreed-upon transaction or lacks the ability to retaliate for a breach of the agreement. An example of adverse selection is when people who are high risk are more likely to buy insurance, because the insurance company cannot effectively discriminate against them, usually due to lack of information about the particular individual's risk but also sometimes by force of law or other constraints. An example of moral hazard is when people are more likely to behave recklessly after insured, either because the insurer cannot observe this behavior or cannot effectively retaliate against it, for example by failing to renew the insurance. Adverse selection or anti-selection is a term used in economics and insurance. ...
This section is studied by Argagui monopoli In law and economics, moral hazard is the name given to the risk that one party to a contract can change their behaviour to the detriment of the other party once the contract has been concluded. ...
Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. ...
Examples of situations where the seller usually has better information than the buyer are numerous but include used-car salespeople, mortgage brokers and loan originators, stockbrokers, real estate agents, and life insurance transactions. The automobile salesman (or salesperson) is one of many sales professions. ...
A mortgage loan is a loan secured by real property through the use of a mortgage (a legal instrument). ...
A stock broker or stockbroker or stock brokerage is someone or a firm who performs transactions in financial instruments on a stock market as an agent of his/her/its clients who are unable or unwilling to trade for themselves. ...
In the United States and parts of the Commonwealth (including Canada and Australia) as well as in many other countries, a real estate agent is a person who advises and represents others in transactions involving real estate. ...
Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the policy owners death. ...
Examples of situations where the buyer usually has better information than the seller include estate sales as specified in a last will and testament, sales of old art pieces without prior professional assessment of their value, or health insurance consumers of various risk levels. An estate sale is a type of garage sale, yard sale or auction to dispose of the majority of the materials owned by a deceased person. ...
In the law, a will or testament is a documentary instrument by which a person regulates the rights of others over his property or family after his death. ...
This article is about the philosophical concept of Art. ...
Assessor as evaluator An assessor is an expert that calculates the amounts to be paid or assessed for tax or insurance purposes. ...
Health insurance is a form of group insurance, where individuals pay premiums or taxes in order to help protect themselves from high or unexpected healthcare expenses. ...
This situation was first described by Kenneth J. Arrow in a seminal article on health care in 1963 entitled "Uncertainty and the Welfare Economics of Medical Care," in the American Economic Review. Kenneth Joseph Arrow (born August 23, 1921) is an American economist. ...
Year 1963 (MCMLXIII) was a common year starting on Tuesday (link will display full calendar) of the Gregorian calendar. ...
George Akerlof later used the term asymmetric information in his 1970 work The Market for Lemons. He also noticed that, in such a market, the average value of the commodity tends to go down, even for those of perfectly good quality. Because of information asymmetry, unscrupulous sellers can "spoof" items (like software or computer games) and defraud the buyer. As a result, many people not willing to risk getting ripped off will avoid certain types of purchases, or will not spend as much for a given item. It is even possible for the market to decay to the point of nonexistence. George Arthur Akerlof (born June 17, 1940) is an American economist and Koshland Professor of Economics at the University of California, Berkeley. ...
The Market for Lemons: Quality Uncertainty and the Market Mechanism is a paper by George Akerlof written in 1970 that established the fundamentals of asymmetrical information theory. ...
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For the Talib Kweli album Quality (album) Quality can refer to a. ...
Forgery is the process of making or adapting objects or documents (see false document), with the intention to deceive. ...
Look up Market in Wiktionary, the free dictionary. ...
Information asymmetry
Information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance in power in transactions which can sometimes cause the transactions to go awry. Examples of this problem are Adverse selection and Moral hazard. Adverse selection or anti-selection is a term used in economics and insurance. ...
This section is studied by Argagui monopoli In law and economics, moral hazard is the name given to the risk that one party to a contract can change their behaviour to the detriment of the other party once the contract has been concluded. ...
A classic paper on adverse selection is George Akerlof's The Market for Lemons. There are two primary solutions to this problem, signalling and screening. George Arthur Akerlof (born June 17, 1940) is an American economist and Koshland Professor of Economics at the University of California, Berkeley. ...
The Market for Lemons: Quality Uncertainty and the Market Mechanism is a paper by George Akerlof written in 1970 that established the fundamentals of asymmetrical information theory. ...
Signaling Michael Spence originally proposed the idea of signaling. He proposed that in a situation with information asymmetry, it is possible for people to signal their type, thus believably transferring information to the other party and resolving the asymmetry. Michael Spence (born November 7, 1943) is an American-born, Canadian-raised economist and recipient of the 2001 Nobel Memorial Prize in Economics, along with George A. Akerlof and Joseph E. Stiglitz, for their work on the dynamics of information flows and market development. ...
In economics, more precisely in contract theory, signaling is the idea that one party (termed the agent) conveys some meaningful information about itself to another party (the principal). ...
This idea was originally studied in the context of looking for a job. An employer is interested in hiring a new employee who is skilled in learning. Of course, all prospective employees will claim to be skilled at learning, but only they know if they really are. This is an information asymmetry.
Spence proposed that going to college can function as a credible signal of an ability to learn. Assuming that people who are skilled in learning can finish college more easily than people who are unskilled, then by attending college the skilled people signal their skill to prospective employers. This is true even if they didn't learn anything in school, and school was there solely as a signal. This works because the action they took (going to school) was easier for people who possessed the skill that they were trying to signal (a capacity for learning).
Screening Joseph E. Stiglitz pioneered the theory of screening. In this way the underinformed party can induce the other party to reveal their information. They can provide a menu of choices in such a way that the choice depends on the private information of the other party. Joseph Stiglitz (born February 9, 1943) is an American economist and a member of the Columbia University faculty. ...
We dont have an article called Screening (economics) Start this article Search for Screening (economics) in. ...
Other notes Although information asymmetry has recently been noted to be on the decline thanks to the Internet, which allows unknowledgeable users to acquire heretofore unavailable information such as the costs of competing insurance policies, used cars, etc. (See Freakonomics.) it is still heavily applied to human resource and personnel economics regarding incentive schemes when the employer cannot continually observe worker effort. The cover of this version of Freakonomics has a picture of what looks like an apple on the outside but is really an orange. ...
Literature - Akerlof, G. (1970). The market for lemons: quality uncertainty and the market mechanism. Quarterly Journal of Economics 84 (3), 488-500.
- Mas-Colell, Andreu; Michael D. Whinston, and Jerry R. Green (1995), Microeconomic Theory. Oxford University Press. Chapters 13 and 14 discuss applications of adverse selection and moral hazard models to contract theory.
- Spence, A.M.: "Job Market Signaling", Quarterly Journal of Economics 83 (1973), pp. 355-377.
- Stigler, George J. (1961). “The Economics of Information,” Journal of Political Economy, June. (JSTOR)
Adverse selection or anti-selection is a term used in economics and insurance. ...
This section is studied by Argagui monopoli In law and economics, moral hazard is the name given to the risk that one party to a contract can change their behaviour to the detriment of the other party once the contract has been concluded. ...
Contract theory comprises many different theories and various interpretations of the various body of rules and subrules that define Contract Law. ...
External links George Arthur Akerlof (born June 17, 1940) is an American economist and Koshland Professor of Economics at the University of California, Berkeley. ...
Michael Spence (born November 7, 1943) is an American-born, Canadian-raised economist and recipient of the 2001 Nobel Memorial Prize in Economics, along with George A. Akerlof and Joseph E. Stiglitz, for their work on the dynamics of information flows and market development. ...
Joseph Stiglitz (born February 9, 1943) is an American economist, author and winner of Nobel Prize for economics ( 2001). ...
See also George Arthur Akerlof (born June 17, 1940) is an American economist and Koshland Professor of Economics at the University of California, Berkeley. ...
Michael Spence (born November 7, 1943) is an American-born, Canadian-raised economist and recipient of the 2001 Nobel Memorial Prize in Economics, along with George A. Akerlof and Joseph E. Stiglitz, for their work on the dynamics of information flows and market development. ...
Joseph Stiglitz (born February 9, 1943) is an American economist and a member of the Columbia University faculty. ...
Contract theory comprises many different theories and various interpretations of the various body of rules and subrules that define Contract Law. ...
Adverse selection or anti-selection is a term used in economics and insurance. ...
This section is studied by Argagui monopoli In law and economics, moral hazard is the name given to the risk that one party to a contract can change their behaviour to the detriment of the other party once the contract has been concluded. ...
In economics, more precisely in contract theory, signaling is the idea that one party (termed the agent) conveys some meaningful information about itself to another party (the principal). ...
We dont have an article called Screening (economics) Start this article Search for Screening (economics) in. ...
In economics, the principal-agent problem treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent. ...
References - ^ http://nobelprize.org/nobel_prizes/economics/laureates/2001/
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