Information asymmetry

Information asymmetry is a situation in which parties to an exchange have unequal information about relevant characteristics or actions. It can distort prices, decisions, and incentives.

Adverse selection: A market problem in which hidden characteristics lead better-informed participants to select or leave exchanges disproportionately. Buyers unable to distinguish quality may drive reliable sellers out of the market.
Transaction cost: A cost of arranging, carrying out, or enforcing an exchange beyond the price of the good itself. Finding and verifying information adds costs to exchange.
Credit rationing: A restriction of lending that persists even when borrowers would accept higher interest rates. Lenders may limit loans rather than raise rates when borrower risk is hidden.
Perfect information: A market assumption that all participants know relevant information about goods, prices, and available choices. It is the opposite benchmark against which unequal knowledge is analyzed.
Moral hazard: A change in behavior when someone is shielded from the full consequences of their actions. Hidden actions after an agreement can let one party shift risk onto another.
Incomplete contract: A contract that leaves some future contingencies or obligations unspecified. Unobservable actions and unforeseen states make complete agreements difficult.
Health insurance: Insurance that covers some costs of medical care and health services. Insurers and applicants often know different things about health risks.
Information asymmetry in games: A game-theoretic setting in which players have different information about types, actions, or payoffs. This formal setting models strategic information gaps beyond ordinary market description.
Signaling (economics): The use of observable actions or traits to convey private information in markets. Informed parties can make their hidden qualities credible through costly signals.
Property right: A legally or socially recognized entitlement to use, control, or transfer a resource. Exchange depends on knowing who controls the asset and what can be transferred.

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