Information asymmetry

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Information assymmetry is a theory from economics. It says that in a contract the two parties of the conract do not have the same information. Information economics is a field of science that looks at some of the problems that result from this bias. Neoclassical economics assumes there is perfect information: all the actors know all the states of their environment; they can also observe what all the other actors do. Information is free -it has no cost in the economic sense. This is also true for the ability to observe the other parties.

A model called New institutional economics changes this: information is no longer free, there are costs associated with obtaining information.

Information assymmetry is concerned with three main asymmetries:

  • Hidden characteristics: Certtain features of the products are not known before the contract is made.
  • Hidden action and hidden information: After the contract is made, one of the actors' actions cannot be observed (hidden action); if it can be observed, its qualities cannot be determined (hidden information)
  • Hidden intention: Before the ocntract is made, all the actors can be observed, but their intentions cannot be known.

History[change | edit source]

In 2001, the Nobel Prize in Economics was awarded to George Akerlof, Michael Spence, and Joseph E. Stiglitz "for their analyses of markets with asymmetric information."[1]

References[change | edit source]