Introduction to Assymetric information
Written by Megna Yadlapalli | Proofread by Yasmin Uzykanova
Asymmetric Information refers to a type of market failure with one party having more Information regarding an economic transaction than the other, and the former party uses that to its advantage.
Two types of Asymmetric Information:
When the buyer has more information than the sellers
When the seller has more information than the buyers
The morals and ethics involved here revolve around one party taking the risk while the other party bears the cost of that risk. This topic can be better explained with an example.
An example of the first type: If Adam is a construction worker and has received a job offer at a new construction site. The head contractor hides that the new site is hazardous for the worker's health to convince many workers to join. Adam agrees to work, assuming his health and safety will be a priority from the provider company.
Here, the contractor and company have more Information than Adam and his fellow construction workers, using it to gain multiple employees. The company takes the risk of hiding the Information while Adam bears the cost of this risk by comprising his safety
( unaware of the potential harm).
An example of the second type: Karim is planning to buy land and has done relevant and extensive research on it. He plans to buy the land from a first-time seller, Arush ( who is in a rush to sell for personal reasons). Arush is selling the ground for 70 crores INR ( without any knowledge of the future land value), and Karim gladly accepts, knowing that the land value will triple in the next year due to real estate aspects and more. So, 70 crores INR is a steal for him.
Here, Karim has more information about the land than Arush, and he takes the risk by purchasing the land. Arush pays the cost of the risk by not selling it for its true potential.
