Asymmetric Information

Asymmetric information, also known as information failure or information asymmetry, is when one individual or party  possesses more material knowledge than the other individual or party involved in an economic transaction. Usually, this happens when the seller of goods or services has more knowledge than the buyer.

Sellers sometimes take advantage of buyers when asymmetric information exists. Asymmetric information is viewed as the desired market economy by economists. For example, workers should specialize in a trade, excel at this trade, and then provide greater value to other individuals in different trades, when it comes to skilled labor.

An online reputation management software can be used by consumers and potential business associates to monitor reviews, learn from negative experiences, and investigate the brand of an organization before continuing to move forward with a business transaction, in order to get a handle on asymmetric information.

Adverse selection and Moral hazards are two main types of asymmetric information. Increased knowledge between experts, enhanced productivity and healthy market economy are the benefits of asymmetric information.

Fraudulent activities, increased cost of goods, likelihood of moral hazard and monopoly of knowledge are some of the disadvantages of asymmetric information. Two-way dialogue, precise paperwork, and honest communication must be used by both parties to lessen the likelihood of experiencing these disadvantages.