Information Asymmetry

Introduction

Information Asymmetry refers to that condition or situation where all the people don't have the same amount of information. For example, if one person has one information will have one information and the other some other about the same topic or product. This kind of state of affairs make the market inefficient as all the members of the market do not have the same amount of information and this makes the decision making process difficult for organizations. This phenomena is completely different from information symmetry

Information asymmetry models

Information asymmetry models helps in understanding the situation of asymmetry in the market. These models assume that either one party in the transaction has full and factual information than the other. This model is useful in situation where in a transaction one person or individual or group has all the information and can pressurize or revoke any breach if happens while the other who has no information cannot. One type of model is adverse selection model where the individual in a given contract is ignorant and has no information even while making negotiations. This situation happens before getting into any kind of agreement or contract. Another type of model is moral hazard in which the individual in a contractual agreement has no power to revoke any breach of the given contract. It is a type of an immoral behavior as it takes advantage of the asymmetric information. This situation arises after a given transaction or contract.

Application of information asymmetry

There are various application of information asymmetry. Some of the applications are:

• Contingency Contracts - The application part of this can be understood in a contingency contract where a loan defaulter is not given any further loans.
• Minimum quality constraints - According to this, it is defined as where in the markets there exist quality constraints and existence is due to information asymmetry. It is noted that because of the adverse selection concept, the efficiency of irregular markets or unregulated markets is tested as information asymmetry exists.
• Job market- This refers to that state when there is difference in information between the workers and the organizations they are working for and also the minimum amount of information shared by organizations when employ people.
• Used pick up truck market- This refers to the situation when old pick up trucks are bought then their maintenance cost is more than those pick up trucks who are bought new. In this situation the information asymmetry exist when less information is available whether to buy new trucks or old.

Conclusion

This model shows competitive market behavior. Its application in various aspects of market is very useful. The application of it is more theoretical than practical.

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