2.10.1 (HL)—Asymmetric information

Asymmetric information exists when one side knows more relevant information than the other. It can cause adverse selection before agreement or moral hazard after agreement.

Hidden quality can drive good products out; hidden actions can shift risk to others.

Identify who knows what and when the gap occurs.

Used-car sellers know quality better than buyers, so low offers may drive good cars out.

An information gap is not automatically harmful if contracts solve it.