Asymmetric information
From Economypedia.com
Asymmetric information signifies a situation in which one party involved in transaction with another, has more or superior knowledge and information than the other. This is often the case between buyer and seller, where seller has more knowledge than buyer. However, the opposite condition can also happen at times. The situation can potentially be harmful as the party with more information can take advantage of other’s lack of knowledge and thereby exploit the other party.
Asymmetric information is the source of two major problems such as the following:
- Moral Hazard – This reflects on the immoral behavior of a party with asymmetric information subsequent to a transaction. For example, some people commit arson purposely to reap benefits from the fire insurance.
- Adverse Selection – In this case, the party displays immoral behavior by taking advantage of the knowledge or asymmetric information prior to transaction. For example, some people secure life insurance although aware of the languishing health.
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Buyer's market
Buyers market is a market where number of sellers exceeds number of buyers. One inevitable implication of asymmetric information in buyer's market is lowering of prices. This happens as supply is more than demand. Buyer's market is also known as soft market. [1]
Seller's market
Seller's market is an economic situation where demand for goods and services is high but supply of same is on a lower side. In case of seller's market asymmetric information results in increasing of prices. In seller's markets sellers fix prices of goods and services with an aim of gaining maximum possible returns. Seller's market is also known as hard market. [2]
Conference call
A companies conference call is used by business establishments to inform investors about various aspects of their investment products and services or other aspects of the overall condition of company. Asymmetric information in conference calls leads to investors being misled and incurring losses. [3]
Insider information
Insider information is basically practical information about a particular company. Normally such information is not provided to public. Insider information is related to asymmetric information as it is held back by companies and allows companies to provide asymmetric information to investors. [4]
See also
Common mis-spellings
- Asymetric information
- Asimmetric information
- Asymmetirc information
- Asymmetric infomation
References
Investopedia entry on adverse selection. Retrieved on August 19, 2008.
Investopediaentry on moral hazard. Retrived on August 19, 2008.
Businessdictionary entry on seller's market. Retrieved on August 19, 2008.
Investorwords entry on buyer's market. Retrieved on August 19, 2008.
External links
Articles on asymmetric information in Answer.com
Further reading
Article in financial dictionary
Article in IMF.org
