What is information asymmetry?
information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry, a kind of market failure in the worst case. Examples of this problem are adverse selection, moral hazard, and information monopoly
Most commonly, information asymmetries are studied in the context of principal–agent problems. Information asymmetry causes misinforming and is essential in every communication process
Adverse selection, anti-selection, or negative selection refers to a market process in which undesired results occur when buyers and sellers have asymmetric information (access to different information); the “bad” products or services are more likely to be selected.
The principal–agent problem or agency dilemma occurs when one person or entity (the “agent“) is able to make decisions that impact, or on behalf of, another person or entity: the “principal“. The dilemma exists because sometimes the agent is motivated to act in his own best interests rather than those of the principal.
Monopolies of knowledge arise when ruling classes maintain their political power through their control of key communications technologies. An example of this occurs in ancient Egypt where a complex writing system conferred a monopoly of knowledge on literate priests and scribes.
- This especially is true in enterprise software
- and online advertising and spam
- and commodities across the globe (oil spikes after iraq, oil slumps after heating oil data, climate data, or even releases from strategic reservoirs)
- and internet spying which may be for economic espionage or trade negotiations but are justified as looking for terrorists.
- and inflation in the developing and poor countries
- and lobbying in the developed and rich countries
People who enable information asymmetry are corrupted people, misled by their own greed and agent-employees in decisions that run counter to the principles when they founded their corporation.
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