Information Asymmetry

Information Imbalance, which is commonly known as information asymmetry, is an adjective used in economics to describe “when one party to an economic transaction possesses greater material knowledge than the other party.” Basically, when someone knows something you don’t, or vice versa. This occurs in almost all economic transactions because someone is ultimately going to have more knowledge or skill on something than someone else. If this were eliminated and everyone was able to have the exact same skills, then the value of the skill would be far less than it is now, when only a few people may possess it. A solution to this would be for workers to study a broad range of trades, which is unrealistic in terms of financial and physical means. The way our American society works is that people will pick up one or two trades and become experts (or mediocre) in them and make their contribution to society by helping those who do not have expertise in the area.

An example of information asymmetry is car mechanics. The mechanic would most likely have more knowledge on the car than the owner because that is their profession. An owner would not bring their car to a mechanic if they knew everything that was wrong with it and would be able to fix it themselves. Because the mechanic has more knowledge than the owner, this is information imbalance.

Asymmetric information has been said to revolutionize modern economic thought since the 1970’s. It began to explain the natural process of the imbalance of information between buyers and sellers. This imbalance of power may cause the market to become inefficient, also known as market failure. Other outcomes may be things such as adverse selection or moral hazard, which revolve around the idea of one side knowing information that the other side doesn’t and leaves the second at a disadvantage. A paper was written in 1970 by economist George Akerlof called “A Market for Lemons” which addresses how the quality of goods in a market can degrade because of the presence of information asymmetry between the buyerss and sellers. Solutions are examined, such as signaling and screening. Signaling refers to the idea of one party conveying some information that they know, to another party. This begins to eliminate some of the imbalance between the two parties. It is important to note that in this case, the agent containing the information is the one to make the move toward informing the other. In screening, a transaction between the two parties in necessary, but the screener, the one who knows less information, is the one to make the attempts to learn from the expert, in this case, the one who knows more.

New arguments have recently arisen where asymmetric information may be over. It is believed that with the evolution of market institutions, the buyer and seller may now have somewhat equal knowledge on a certain product or skill. Technology has opened up doors for people to learn or research information on products. In the example of a used car salesman having more knowledge about a car than the buyer, as used in Akerlof’s research paper, current day technologies allow for the buyer to access some information of the car’s previous life. “Black boxes”, or “event data recorders” can relay information of crashes and accidents that the car previously experienced and other technical problems/knowledge on the car. People who are not car experts have access to this technology, therefore may know as much about the car as the salesman.

While there are arguments both for and against asymmetrical information and the survival of it may be in the hands of emerging technological advances, it is useful in multiple ways. By creating an environment where people strive to learn a skill or trade, gives them motivation and hope to create a working society. I believe our society flourishes when people are masters in one subject and can share their talent to the world. If all people had the same skills, society would be boring and no one would be able to stand out and express their unique abilities.

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2 thoughts on “Information Asymmetry

  1. I’m curious to know more about these arguments that information asymmetry is “over.” On a grand scale, I can see how that’s plausible, but in particular instances it must still be the case. (To use a crude example, a teacher knows more about how students in a class are performing than each student does, which can have certain impacts on classroom dynamics.) (Everything’s fine in our class!)

    Was there any further discussion of just how information asymmetry had ended?

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    • I think there are arguments towards technology and the internet and it’s affect on how people can now get information that they did not have access to before. However, this argument also has it’s flaws, as the internet contains inaccurate and incorrect information. Economists Alex Tabarrok and Tyler Cowen made the argument in their online article titled The End of Asymmetric Information, that information is so readily available on the internet that it may have an impact on this theory of asymmetric information.

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