Problems of asymmetric information and their impact in the economy
Asymmetric information is characteristic of many situations in business. As a rule, the seller of a product knows more about its quality than the buyer. Workers know their skills and better skills than employers. And managers know them better skills than the owners of enterprises. Asymmetric information explains many institutional rules in our society. This concept makes it clear why the car companies offer warranties and services for new models; although firms and employees connect and reward incentive contracts; although corporate shareholders should monitor the behavior of managers. Asymmetric information is the uneven distribution of information about the product between the parties to the transaction. The situation of asymmetric information arises in the process of entering contracts or transactions, where individual participants important information that have direct connection with the subject of the contract, transaction, which the other participants do not possess. There are some major problems that appear in the financial markets due to information asymmetries:
- the problem of adverse selection;
- the problem of dishonesty risk;
- the problem of costly state verification.
For example, in the case of securities based on mortgage, the problem of information asymmetry is manifested in the fact that their issuer has more information than the investor about the quality of the securities offered and mortgage loans behind them. Lack of enough information on securities based on mortgage between investors may make them reluctant to buy securities or require an increase in the securities yield as compensation for risk.
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