Information Asymmetry

What is Information Asymmetry? – Market Failure. Others are: Externalities, Non-exclusion & the commons , Non-rivalry & Public Goods, and Non-convexitie refers also as market failure.

Definition: Asymmetric information is a situation in which economic agents involved in a transaction have different information, as when the a private motorcycle seller has more detailed information about the its quality than the prospective purchaser, or an employee will know more about their ability than their employer. Information that is distributed asymmetrically between economic agents can be categorized as ex ante, pre-contractual of the transaction, or ex post, post-contractual of the transaction, that will influence economic behaviour and operation of the market(Stiglitz,1993).

Argument based on Akerlof (1970) The degree of performance from the Best to the Worst called The Market for Lemons emphasis of 1) Moral Hazard – availability secondary markets are Lemon; 2) Pooling Equilibrium – mimicking Strategy; 3)Adverse Selection – analysis of problems; 4) Screening – focus group and control; 5) Certification, Costly Signaling and the Separation Equilibrium – recognization; 6) Reputation - past record and performance; 7) Contract Enforcement – follow-up against contract; and 8) Guarantee – built-in responsibility and confident

Argument base on Spencer (1973) Based on Job Market signaling. It is extended version of Akerlof’s to Information transfer mechanism. Lead to Information Equilibrium Problems with Signaling:

• A Signal should be credible

• A signal should separate high and low quality sellers. 1) A signal sent by a seller of a high quality product should not also be capable of being sent by the seller of a low quality product; and 2) A signal should not be too costly for high quality sellers to send

Basic causes of information asymmetry in the markets for corporate securities are 1) Product market competition; and b) The separation of ownership &...