In economics, information asymmetry occurs when one party to a transaction has more or better information than the other party. (It has also been called asymmetrical information and markets with asymmetrical information). Typically it is the seller that knows more about the product than the buyer, however, it is possible for the reverse to be true -- for the buyer to know more than the seller.
Examples of situations where the seller usually has better information than the buyer are numerous but include used-car salespeople, stockbrokers, real estate agents, and life insurance transactions.
Examples of situations where the buyer usually has better information than the seller include estate sales as specified in a last will and testament.
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.
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. It is even possible for the market to decay to the point of nonexistence.
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.
In economics, information asymmetry occurs when one party to a transaction has more or better information than the other party.
George Akerlof later used the term asymmetricinformation in his 1970 work The Market for Lemons.
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)
Information is asymmetrical, for example, when consumers cannot adequately judge the quality of the product or service they are buying, yet producers can judge the demand for their product.
The specific case of asymmetricalinformation exists when forest landowners, the consumers, cannot adequately judge the quality of the logging service that they are buying, yet loggers (producers) can judge the demand for their service.
Market failure due to asymmetricalinformation may also be addressed through means that do not restrict the number and quality of practitioners in the occupation but that make it possible for consumers to judge the quality of the service themselves.
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