5 Questions
What is the definition of symmetric information?
Everyone is equally knowledgeable about prices and product quality.
Which of the following best describes hidden action?
An attribute of a person or thing known to one party but unknown to others.
What is an example of hidden characteristic?
One party taking economic advantage of another when circumstances permit.
What behavior does asymmetric information lead to?
Opportunistic behavior, where one party takes economic advantage of another.
What happens when both parties have equal or equally limited information in a transaction?
Neither has an advantage over the other.
Study Notes
Asymmetric Information
- Symmetric information refers to a situation where all parties in a transaction have equal access to information.
- Asymmetric information, on the other hand, occurs when one party has more or better information than the other party in a transaction.
Hidden Action and Hidden Characteristics
- Hidden action refers to a situation where one party takes an action that is not observable to the other party, affecting the outcome of the transaction.
- Hidden characteristic is a trait or feature of a good or service that is not observable to the buyer, such as the quality of a used car.
Consequences of Asymmetric Information
- Asymmetric information can lead to adverse selection, where one party takes advantage of the other party's lack of information, resulting in a bad deal for the uninformed party.
- When both parties have equal or equally limited information in a transaction, the transaction is said to have symmetric information, which can lead to more efficient outcomes.
Note: These study notes summarize the key concepts and definitions related to asymmetric information, hidden action, and hidden characteristics.
Test your knowledge of asymmetric information in economics with this quiz. Learn about hidden characteristics and hidden actions in transactions, and how they can create information imbalances between parties.
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