Asymmetric information
One side of a dealing knows something that matters to both of them and the other side does not.
Often misread asUsing asymmetric information to mean any situation involving risk or incomplete knowledge, so uncertainty about weather or demand gets filed alongside a seller who knows the car's history.
How to see it
One side knows something the other needs
Asymmetric information means one party holds information the other would pay to have, and both know this. It is not the same as uncertainty, because uncertainty shared equally causes no strategic trouble at all. The difficulty is that the informed side can act on what it knows, so the uninformed side has to work out what that behaviour implies.
The checkAsk who knows what the other does not. If the answer is nobody, it is risk, and no amount of contracting cleverness is called for.
Try itTwo cases: a harvest depending on rainfall nobody can predict, and a seller who has driven the car you are about to buy. Say which is asymmetric, and then say what the uninformed party in that case should be trying to infer from the other side's behaviour.
Games that show it
Know these first
Leads on to
Easily confused with
Sources
- Akerlof, G. (1970). Quarterly Journal of Economics 84(3), 488-500.
- Mas-Colell, A., Whinston, M. & Green, J. (1995). Oxford University Press.