"Asymmetric information, sometimes
referred to as information failure, is present whenever one party to an
economic transaction
possesses greater material knowledge than the other party. This normally
manifests itself when the seller of a good or service
has greater knowledge than the buyer, although the opposite is possible. Almost
all economic transactions involve information asymmetries.
Asymmetric information is the
specialization and division of knowledge in society as applied to economic
trade. For example, medical doctors tend to know more about medical treatment
than their patients; after all, those doctors specialize in medicine, while
their patients do not. The same principle applies to manufacturers, teachers,
police officers, attorneys, restaurant operators and yoga instructors, or any
other specialized profession.
Economic Advantages
Growing asymmetrical information
is a desirable outcome of a market economy. As workers specialize and become
more productive in their fields of expertise, they can provide greater levels
of value to workers in other fields. For example, a stockbroker’s services are
less valuable to customers who already know enough to buy and sell their own
stocks with confidence.
One alternative to ever-expanding
asymmetric information is for workers to study in all fields, rather than
specializing in those fields where they can provide the most value. This comes
with large opportunity costs and would likely result in a lower level of aggregate
output, lowering standards of living.
Another alternative is to make
information abundantly and cheaply available, such as through the internet.
This does not replace asymmetric information, however. It only has the effect
of moving information asymmetries away from simpler areas and into more complex
areas.
Possible Problems
In certain circumstances,
asymmetric information may lead to adverse selection or moral hazard. These are
situations where individual economic decisions are hypothetically worse than
they would have been had all parties possessed more symmetrical information.
Most of the time, the solutions to adverse selection and moral hazard are not
complicated.
Consider adverse selection in life
insurance or fire
insurance. Higher-risk insurance customers, such as smokers, the
elderly or those living in dry environments, may be more likely to purchase
insurance. This could raise insurance premiums for all customers, forcing the
healthiest to drop out. The solution is to perform actuarial work and insurance
screening, then charge different premiums to different customers based on
potential risk."
Source: Article 'Asymmetric Information' published on Investopedia
“Following the seminal work of
Stiglitz and Weiss (1981), a large theoretical literature has stressed the key
role of asymmetric information in lending markets. A majority of studies shows
that asymmetric information can generate market failures such as credit
rationing, inefficient provision, mispricing of risk, and, in the limit, market
breakdown. Moreover, a financial crisis can exacerbate the negative effects of
adverse selection and moral hazard in financial markets (Mishkin 2012).
Deepening our understanding of the extent and effects of asymmetric information
is key for the design of a regulatory framework that limits their negative
consequences. The theory has analysed the effects of asymmetric information
mostly under the assumption of a perfectly competitive credit market, an
assumption that is not likely to hold in many relevant markets.
Correspondingly, there is no clear evidence of the effects of the interaction
of asymmetric information and imperfect competition in lending markets.” As
stated in article titled ‘Asymmetric information and imperfect competition in
lending markets’ on Voxeu.org
44 comments:
True.
Asymmetric information gives one party an edge over the other party in any transaction and this hampers the growth of say to perfect markets.
Also, this can be good keeping in mind that all consumers cannot have knowledge of all the things they want or need to purchase or service with, but at the same time this can also create hazardous situations where consumers are forced to act as the other party wants them to just because of lacking knowledge.
This needs to change and this can only come if the party who possese greater knowledge about the service or product whatsoever stop using this as a headonistic tool for their gains only.
And, obviously a rational consumer should be able to have more and more knowledge about the purchases he wants to make and by this, we can halt the growth of asymmetrical based economy.
Work of Joseph Stiglitz is highly valued and well read in this aspect.
Mihir Abhay Bedekar
17BAL089
Asymmetrical market is a reality these days. It is beneficial for one party but harmful for the other in most of the situations. If we simply take the example of doctor given here, it is good for the medical experts to have knowledge in their field but they can also misuse their knowledge to trick their patients which is mostly the case these days. There are many more situations where asymmetrical market causes loses to one party and which eventually hampers the growth of perfect market. Therefore creating awareness among the people about the facilities they are using is very crucial.
Ayushi dubey
17bal015
Asymmetrical market is a reality these days. It is beneficial for one party but harmful for the other in most of the situations. If we simply take the example of doctor given here, it is good for the medical experts to have knowledge in their field but they can also misuse their knowledge to trick their patients which is mostly the case these days. There are many more situations where asymmetrical market causes loses to one party and which eventually hampers the growth of perfect market. Therefore creating awareness among the people about the facilities they are using is very crucial.
Ayushi dubey
17bal015
when information is asymmetric, prices
are distorted and do not achieve optimality in the allocation of resources. Standard
government interventions such as regulation of monopolies to replicate a competitive
environment, or fiscal policy to alleviate the effects of externalities, are no more
sufficient to restore optimality.
There are two basic models that describe information asymmetry and they are:
Adverse Selection
Moral Hazard
Asymmetric information in financial markets
Asymmetric information is a problem in financial markets such as borrowing and lending. In these markets the borrower has much better information about his financial state than the lender. The lender has difficulty knowing whether it is likely the borrower will default. To some extent the lender will try to overcome this by looking at past credit history and evidence of salary. However, this only gives a limited information. The consequence is that lenders will charge higher rates to compensate for the risk. If there was perfect information, banks wouldn’t need to charge this risk premium.
Asymmetric information in insurance
Another example of asymmetric information is with regard to insurance. When insuring a good the insurer is uncertain how well the customer will look after a piece of property. For example, if a consumer was careless with locking his bike, the insurer would not want to insure it. This problem can lead to the related problem of adverse selection.
To overcome asymmetric information in insurance, insurers will give big discounts for ‘no claims bonuses’ this is the best way of gaining better information about ‘careful’ and ‘unlucky’ consumers
according to me -asymmetric information is harder to come by in developed markets because technology has made information dissemination increasingly ubiquitous and timely. Nonetheless, it is important to note that not all information is good information; that is, just having information that others don't have doesn't necessarily make that information valuable or even correct. Additionally, it is important to be aware that trading on asymmetric information may be illegal.
17bal087 lakshya chaudhary
Asymmetric information which means have excessive knowledge of some specific thing. As discussed in article that doctor has more knowledge than their patients so we can say that in doctor and patient, doctor has the edge to make his profit and patient will easily make doctors profit as he is unaware about medical treatment. So basically the term asymmetric information is the term which means Seller or the one party has the edge or have excess knowledge.. Asymmetric information badly hampers the market as one side have inuf knowledge to make their profit which gives loss to buyer or the one who do not have inuf knowledge and it is not just to use asymmetric information for making profit or for bad purpose
Mayank sahu
17bal029
Asymmetrical information is desirable outcome for market economy makes sense , as when consumers will feel that services provided to them are valuable , will they pay more for it. But at the same time it could lead to their exploitation as they will be the ones on the receiving end. If consumers don't have enough material knowledge , how will they be able to assess the intrinsic value . it just goes on to show that everything has it's merits and demerits and cannot be believed blindly
Vanshika agarwal
17bal117
Assymetric Information
i disagree
Yes asymmetric information can be good for market economy but,
Often market failure results from consumers suffering from a lack of information about the costs and benefits of the products available in the market place. Government action can have a role in improving information to help consumers and producers value the 'true' cost and/or benefit of a good or service. Examples might include:
Compulsory labelling on cigarette packages with health warnings to reduce smoking
Improved nutritional information on foods to counter the risks of growing obesity
Anti-speeding television advertising to reduce road accidents and advertising campaigns to raise awareness of the risks of drink-driving
Information campaigns on the dangers of smoking addiction and binge-drinking.
Prakhar dixit
17bal039
Assymetric information
This can be used by many high class people and they can exploit the customers i want to explain this by example of medical treatment example.
A sick individual’s superior knowledge of their medical needs gives them an asymmetric information advantage in purchasing health insurance. Sicker consumers are willing to pay higher prices for medical insurance based on higher anticipated medical costs. In response, private health insurers screen customers to eliminate high medical users (i.e. to avoid “adverse selection”), establish coverage limits and increase premiums to cover perceived financial risk. Higher premiums distort the health insurance market for healthy consumers and many exit. In these ways, information asymmetry contributes to the health system’s high absolute costs, high administrative costs, its large uninsured population and the inability of many people to afford needed care.
Less documented is the impact information asymmetry has on healthcare delivery once patients enter the system. Information asymmetry helps cause outcomes in the following three ways:
1.Doctors and other caregivers overwhelm patients with information and deliver treatments that often are unnecessary.
2.Doctors and other caregivers do not engage patients sufficiently and fail to provide necessary care.
3.Uniformed patients demand unnecessary treatments (often based on anecdotal experience, social media conversations or faulty research).
In the same way that used-car buyers question a seller’s motivation, Americans increasingly question whether providers act in patients’ best interests. They turn first to the internet, not doctors, with medical questions. They are exhibiting higher levels of innate distrust toward providers. Negative media coverage, like Time Magazine’s “Bitter Pill” cover story, fuels consumer distrust. As health companies adapt to health reform in a cloud-based world, they must find ways to build customer trust/loyalty and signal their alignment with patients.
so this can be used in negative sense which harm the customers and the market working will be corrupted.
JATIN KHUSHALANI
17BAL024
When one participant in an economic exchange knows more than the other, a situation referred to as the problem of asymmetric, or unbalanced, information.
There is likely to be a misallocation of scarce resources, with consumers paying too much or too little, and firms producing too much or too little. Assymetric information is common and appears to exist in numerous market exchanges.
It can be argued that markets work best, that is they are at their most efficient, when knowledge is perfect and is evenly shared by all the parties in a transaction. Hence, asymmetric knowledge is an economic problem because one party can exploit their greater knowledge.
There are many examples of Assymetric information associated with economic transactions, including the following cases:
1. The job applicant, who fails to reveal at a job interview that they do not have a particular skill for the job.
2. The estate agent, who exploits the fact that a potential buyer of a property has very little knowledge about the property, and any possible problems.
3. The cigarette manufacturer, who does not inform smokers of the true health risk of smoking.
4. The buyer of a financial product, who is unaware of the true level of risk, as in the case of derivative products.
5. The seller of a pension, who misleads purchasers about the financial value of the pension. Indeed, widespread pension 'miss-selling' by large UK insurance companies, occurred at the end of the 1990
Arihant Jain 9(17BAL011)
An example of the same is :
Geeta wants to buy 500 shares of Company ABC, a leading construction company. Shyam has 500 shares of Company ABC that he wants to sell because he has inside information that the company is about to go bankrupt. Since Shyam has more information on the company’s true financial situation, there is information asymmetry, and he can capitalize on this information to avoid losses. On the other hand, Geeta, who is not aware of the possibility of the company’s bankruptcy, is more likely to lose her money on the stocks.
If Shyam does not sell his shares, and the company’s financial problems become public, he will lose more money because the stock price will decline sharply, causing all stockholders of Company ABC to lose their money. Therefore, Shyam, should take advantage of the inside information and sell his shares before the entire market acquires a full knowledge of the company’s financial situation.
In spite of the debate about whether asymmetric information is a market failure that needs to be addressed by state intervention, or if it’s a consequence of economic rationality and is therefore meaningless to be addressed by the state, in comparison with Marshall’s concept of perfect competition as the condition of efficiency in allocation, it can be stated that the imbalance in information between the market sides of supply and demand is inefficient in allocation because different quantities of product are sold at a different prices than in the case of perfect competition. There is a common situation in a real life, when sellers have known positive and even some negative features of a product and may have tried to hide them from customers for purely business reasons. If customers would be as well informed as the retailers, and if they knew all aspects of the products, including negative ones, their demand would be probably unique.
Devansh Jain
17BAL020
asymmetric information can do prove to be unfavorable for the proper functioning of the market. especially in most of the cases it is the consumer who suffers the most because of it. consumer don't receive total information regarding the product and thus make decisions on partial information which most of the times seller tries to impart into his/her mind for personal gain.
thus it is important for proper functioning of the market that both seller and the government make all the information available to the consumer ,so that a consumer get able to make rational decision. and this can be done through advertisement and spreading awareness through electronic media.
even the consumer on the other hand shall voluntarily participate in imparting that knowledge which is being made available to him/her. a consumer shall should be well versed in all the field including even his field of interest.
thus in this way there would be optimal allocation of resources and even reasonable pricing would be done.
now its not always the consumer who suffers in some cases even sellers get affected of this asymmetric information. they could be selling the product below the optimal market price due to lack of knowledge about the total cost and profit to be achieved and arising a situation of exploitation, which directly leads to malfunctioning of the market.
abhinav bishnoi
17bal123
Asymmetric information which means has excessive knowledge of some specific thing, it means that one party has an edge over another, it happens when seller has more knowledge than the buyer, although opposite case is also possible. All economic transactions have asymmetric information.
This principle applies to manufacturers, teachers, police officers, attorneys, restaurants operators, yoga instructors, or any other profession which requires the special training.
It has economic advantages also as given in the article for example, a stockbroker’s service is less valuable if the customer knows how to buy and sell the shares to earn profit with his/ her own confidence.
Asymmetric information is a problem in financial markets such as borrowing and lending. In these markets the borrower has much better information about his financial state than the lender. It can be seen that lender has the risk of losing his money if the borrower has the mindset to default the sum borrowed. To counter this lender charges very high amount of interest so that they could recover their money.
Kunal Agarwal
17BBL023
Asymmetric information risk is ever present in financial markets and can represent a very significant factor. Asymmetric information can exist between companies and investors or analysts, between investment firms and investors, and between different financial institutions, and even between government and consumers which directly results into market failure.For example, a seller of a second hand car has better information about the quality of the car than the prospective buyer. A job seeker may have better information about her productivity than the prospective employer. A borrower may have better information about the riskiness of the project she is about to undertake than the lender. Somebody who buys health insurance may have better information about the state of her health than the insurance company selling the insurance information asymmetry is being done by the sellers or companies just to maximize the share of their profits and which results in worsening the condition of the buyer so at last the buyer goes in loss and which results in a disequilibrium in market and which further results into misallocations of resources causing market failure.
therefore the need of hour is to overcome this tragic problem there are various ways by which asymetric information can be overcome one is blogging.
In modern days, Blogging is playing a central role in reducing the effects of what's known as "insider trading".It's also known that blogging on financial websites provides bottom-up communication among investors, analysts, journalists, and academics, as financial blogs help prevent people in charge from withholding financial information from their company, as well as the general public. Compared to traditional forms of media such as newspapers and magazines, blogging provides an easy venue to provide information to the public.
Tushar choudhary
17BAL115
Increase in taxes: distorts relative prices of goods and services (unless they're perfectly calculated to account for externalities, and adjust to fit changing condiditions, not that this ever happens, but it's a theoretical possibility, if utterly implausible.) Markets become less efficient.
Increase in asymmetrical information: increases transactions cost and reduces the willingness of the less-informed party to engage in exchange. Markets become less efficient.
Decrease in asymmetrical information: the opposite of the above, for the same reasons. Markets become more efficient.
Higher transactions cost: individuals benefit relatively less from engaging in any particular exchange, making both participants less willing to trade, even though trading would result in a more efficient distribution of resources. Markets become less efficient.
Fewer competitors: purchasers have fewer options, which suggests that firms have a greater degree of monopoly pricing power than they had before; but fewer, larger firms may have lower costs of production which increases the quantity supplied. If the industry is characterized by relatively free entry and exit, fewer competitors could mean a more efficient market; if the industry is characterized by relatively high barriers to entry and exit, fewer competitors mean a less efficient market. The net effect on market efficiency is ambiguous.
Karan Choudhary
17BAL085
Asymmetric information is a problem that economists should always consider in the analysis of markets, as it tends to create market failures in product markets where low quality products drive out good quality products, insurance markets where low risk groups do take out insurance and high risk groups do, and other markets where principals do not receiving productivity/return from agents. Complexity of the items being traded will usually ensure there is asymmetric information in the particular product market. Therefore it is not just the uncertainty economic agents face, but the distribution of the information between agents that can influence their actions in the market.
The existence of asymmetric information explains why manufacturers offer warranties(mandatory and optional), incentive and reward contracts are offered to employees, and that shareholders need to monitor behaviour of firms managers to ensure return on their capital.
Example: Motor Vehicle Market(Quality)
Akerlof(1970) posed a question as to why there is such a large price difference in new motor vehicle and those that have just left the showroom. Akerlof developed the concept of asymmetric information about the motor vehicles quality because the sellers knows more about the motor vehicle than the buyer. Buyers with a lack of knowledge about the motor vehicle would ask the question, why is it for sale? - is it a "lemon"? Therefore all prospective buyers would be suspicious of the quality of used motor vehicles and infer quality from pricing policies of sellers(Pindyck and Rubinfeld,1989).
Akerlof’s model is developed on the simplified basis that there are two types of used motor vehicles available, high quality or low quality, with sellers knowing the quality, and buyers cannot distinguish the quality. A simplified numerical example explains the results of quality differences:
We assume that the seller of a low quality motor vehicle will sell for $500, the seller of a high quality motor vehicle will sell for $1200, and buyers will be willing to pay $700 for a low quality motor vehicle and $1500 for a high quality motor vehicle. Buyers will have to estimate how much a motor vehicle is worth, and we assume the probability of obtaining a high or low quality motor vehicle is equal. If a buyer will pay the expected value of a motor vehicle, then they would be willing to pay 0.5*700+0.5*1500=$1100.
The only seller willing to sell would be that of the low quality motor vehicles ($500<$1100<$1200). Therefore only low quality motor vehicles would be offered for sale and buyers would expect to get a low quality motor vehicle and no high quality motor vehicles would be sold. Market failure will occur because selling a low quality motor vehicle affects the buyers perceptions of the quality of all motor vehicles, the price they are willing to pay, and affects the sale of all good quality motor vehicles(Varian,1990).
Where there is an absence of full information,, or a high cost of obtaining all the information required, low quality goods will drive high quality goods out of the market, or even collapse the market
Solutions that are available to correct market failure in relation to quality asymmetries are:
o Reputation - High quality product sellers can build a reputation to differentiate the high quality products.
o Standardization - To help with the problem of building a reputation, sellers may standardize the high quality service/good. e.g. McDonalds or KFC around the world.
o Guarantees and Warranties -Higher quality products can overcome asymmetric information problems by signalling product quality through an extensive warranty or guarantee(Pindyck and Rubinfeld,1989).
Anusha Shekhawat
17bal010
Firstly, I want to start with the question,
What is Asymmetric Information and what are its adverse effects ?
Asymmetric Information means that there is unequal knowledge between each party to a transaction, that one party has better information than the other the party. This creates an imbalance in a transaction.The problem with asymmetric information, where one party has more information than another, occurs before the transaction takes place/pre-contractual problems. Used car owners have more information than they disclose while selling their cars. The people seeking insurance are more likely to need insurance, which means that the decision maker usually has poor selection.
Now through an example we understand how it works?
For example, consider a potential buyer of Company ABC shares and the seller of those shares. If the seller knows the CEO's brother and has heard that the company is facing undisclosed financial problems, then the seller has asymmetric information.Obviously, seller would want to sell the shares before the news was available to the public. Once the company's problems are made public, it is likely that the shares will plummet causing anyone that owns stock in ABC to lose money. Essentially, the seller is taking advantage of the buyer's lack of knowledge.
The impact of Asymmetric Information is in decision making process vitally in 2 sectors markets:- 1) Financial sector markets and 2) Capital sector market.
Impact on financial market:-
Every firm has to inevitable take recourse to the external source of financing while preparing the mix of owners fund and the borrowed funds. Both the parties to this financial transaction have to have exchange the relevant information between each other. Do, both the parties pass on the symmetric information is a moot question. It is proved by several examples in the domestic and the global finance symmetric information is theoretical and whereas the asymmetric information is a reality.The borrowers voluntarily or per force take recourse to concealing of the information for making their case as a strong candidature for obtaining the external finance.It, therefore, reduces the ability of the lending institution to foresee the hazards inherent to the project. The feasibility and the viability of the proposed project are miscalculated due to the imperfect information received from the borrower. The imperfect decision made on the on the basis of imperfect information has a cascading effect on the financial market legitimately resulting in economic crisis.
Impact on capital market: -
Equity market works on the forward looking statements and published financial and other data made available by the company as public information. This forms the base information on which price of equity is determined. In an ideal case of perfect symmetric information being available to all the parties in the market using the same tools, everybody will come at the same price for the equity. However, in practicality there is never perfect symmetric information available about the equity. Parties with some additional information about the equity (which is concealed from others) will come up with a new estimate for price of equity, and hence there will be a trade of equity. Equity market functionality is thus based on assumption that there is asymmetric information in market and hence every investor will have different views about price of equity. However in developing markets; because of the inbuilt flux of a developing economy information asymmetry is higher; and hence the getting a daily return of over 5% if very normal in these markets.
So, at last I want to say some economists through their warnings offer some clues to salvage the uncomfortable economic situation.
JASKARAN SALUJA
17BBL015
We consider market competition in a two-sided market, where the two sides (buyers and sellers) have uncertainty and asymmetric information concerning the value of a new technology. We find that market competition may lead to a market failure: competition may result in a lower level of trade and lower welfare than a monopoly, if the difference in the degree of asymmetric information between the two sides is below a certain threshold. Multi-homing solves the market failure resulting from asymmetric information.
When asymmetric information leads to market failures, governments and private organizations
often respond in ways that reduce the potential economic losses. Sometimes the
government mandates minimum quality standards, which reduce the asymmetry of information.
Many cities, for example, require restaurants to meet standards for cleanliness.
Product liability laws also help reduce the effects of asymmetric information. These laws
require manufacturers of defective products to compensate buyers for certain types of
losses. By imposing prohibitive costs on very low quality firms, they reassure consumers
that the available products meet minimum quality standards. Private organizations, such
as Consumer Reports, also serve as quality certifiers. Because poorly informed parties
are often willing to pay for better information, many such organizations see asymmetric
information as a profi t opportunity.
Even when governments and other organizations provide no remedies for asymmetric
information, market participants themselves may respond in ways that reduce the potential
economic losses. Experienced buyers may share information with those who are considering
a firm’s product. On Flipkart, for example, past purchasers can post reviews of a
seller’s performance. Poorly informed market participants may also gather information
about prospective trading partners, usually at a cost. For example, a life insurance company
may require applicants to have medical examinations, and a potential buyer of a used
car may insist on bringing it to a mechanic for an inspection.
SOMESHWAR SINGH CHANDEL
17BAL112
Asymmetric information has a positive as well as negative impact on the market,as one party to the transaction may utilize his/her knowledge of the market in such a way that can either exploit or benefit the other,example Buyer and seller relationship where sometimes seller has more wider or distinct knowledge about the good he/she is selling which induces the buyer to buy it, and are able to charge the desired amount from the customers.
These type of information is best suited in uplifting the efficiency,productivity and growth of the worker who in future contributes heavily in transforming the current economic scenario.
Moreover, our Indian market finds these information very essential,vital and beneficial because they attract customers/consumers who lack proper understanding of certain policies,insurance,shares and etc ,so that they can be benefited by them.
But these type of information is not always beneficial they can also cause harm to our markets as inclination towards a particular brand,company,good etc may prevail and promotion of demeritorious goods like drugs,tobacco,cigarettes etc can also exists if no proper/useful/warning information is given.
ADHIRAJ SINGH
17BAL005
Asymmetry of information occurs when some people know more about the changes than other people. This causes inefficiencies. The inefficiencies could be eliminated, and the market failures corrected, if everything stopped long enough for the information asymmetries to be eliminated and an efficient allocation calculated by the Planning Committee. But during those weeks of inactivity many people would have starved to death, the weather would have changed, children would have been born, and not everyone would be equally knowledgeable about all the changes, so information would be asymmetric, and the market would be inefficient and “fail”.
Manav Patel
17BAL028
Workers when study in all fields, rather specializing in a particular service sector can avoid being exploited or submit before other sectors, although this would result in a lower aggregate output, it would eradicate inclination of customers towards a particular brand or company which could lead to a biased market. Therefore, I assert that there should not be a totally inclined information asymmetry between the buyer and the seller (although asymmetry will always be present but should be such to avoid exploitation of the consumer)
AARSH RAJ
17BAL063
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).
Example: Insurance Market(Pooled)
With insurance, any potential buyer faces different probabilities of an insurable event occurring, some at least under his control. Therefore an assumption can be made that individuals are either Low Risk or a High Risk of the insured event happening, but they are not individually identifiable by the insurer. General assumptions are:
o High risk individuals are most likely to claim on insurance and will be enthusiastic to purchase full insurance.
o Low risk individuals are unlikely to claim insurance and are therefore willing to purchase insurance at a discounted rate(Stiglitz,1993).
Insurers in the market offer an insurance contract at a premium set at the average probability of a claim where it equals the premium income. i.e. a pooled premium, ensuring average losses from claims are equal to the premiums collected. As premiums rise, low risk individuals will not be willing to buy insurance so losses will occur to the insurer and hence market failure will occur(Rees,1989).
The adverse selection problem is that the potential insurer buyer has hidden information from the insurer before a contract is entered into, and the insurer could not afford to offer full insurance to low risk individuals because it would incur a loss(Rees,1989).
Solutions to adverse selection in the insurance market include:
o Trying to obtain critical information before insurance is provided. e.g. pre-inspection before fire insurance is provided.
o Offer full insurance at a high premium and partial insurance at lower premium to help identify individuals into their respective risk groups.
Asymmetric information is a problem that economists should always consider in the analysis of markets, as it tends to create market failures in product markets where low quality products drive out good quality products, insurance markets where low risk groups do take out insurance and high risk groups do, and other markets where principals do not receiving productivity/return from agents. Complexity of the items being traded will usually ensure there is asymmetric information in the particular product market
Priyal Shukla
17bal041
as seen, asymmetric information can only be possible in the situation when there are various sellers and every sellers who cant bring down their prices to sustain and attract the customers tries to exploit the customers through manipulating and creating virtual information. this happens many times with general goods that we use daily example toothpaste, soft drinks here the sellers give the information regarding the components used in the product but even if the material used is hazardous in nature tries to manipulate the information by saying that the material used is all good and best for the consumption, this happened with the Maggie who said they us lead in their product but then projected that what they are doing is fine for the health of their customers.
asymmetric information is not possible in monopoly because their is only one player present in the market and anyway people have to buy things from that seller only (if they want to buy) it is also not possible in perfect market because here the buyers and sellers know equal about the product and both cannot fool anyone.
asymmetric information might be good sometime for the growth of the market but sometime it can be disastrous as seller can fool the buyers and can play with important facts and information of the product, this can also happen with other side i.e buyers can fool up the sellers and present wrong information which is not desirable in the market
NIKUNJ MAHESHWARI
17bal093
Asymmetric Information comes in a category of Imperfect Information. To under what is imperfect information, we need to understand what is perfect information.
In a perfectly competitive market, it is extremely important to have perfect information. That is the service provider has exactly as much knowledge as the consumer/receiver about the product.
For example, in case of a shoe, the buyer has exactly same level of knowledge as the shoe-maker in terms of cost of leather, making charges, cost and quality of sole used etc.
However, in most cases what we receive is imperfect information which is not balanced on both sides and hence called Asymmetric Information.
Either the buyer or the seller is above the another.
The article says this asymmetry to be a desirable outcome of the market economy. THe kind of markets we have, not all can have expertise in all fields. A doctor cannot be expected to have as much knowledge as a film maker of movies, a film-maker need not know law in as much depth as a Lawyer.
We have a market of inter-dependency
What if this expertise is available cheaply through internet? Well, what's the point of doing an MBBS or LLB or B.Tech if everyone is psuedo-knowledgeables by reading on the internet?
Why would anyone pay a package of 20/25 Lakhs to a lawyer then?
Truly, the standard of living would eventually fall.
And also, at times it leads to moral hazards, like my fellow batchmates pointed out how the one in more power may try to fool the another.
Moral hazards arise when it is hard to regulate an individual's behaviour in the market. We live in world of manipulation.
What is the solution then?
Government solution? No No! Why? Because I have suffered enough by "regulation" in price flooring and price ceiling.
Another, having separate equilibrium. Different rates and services for different requirements.
An example, which almost all websites state is that of health insurance. Here the insurace receiver is more powerful as only he knows how healthy he is and the insurance company might be fooled. Therefore, tell us what all diseases you have, and we customize your insurance plan as per your requirement.
Mr. X's requirement may not be same as Mr. Y's.
Another method I came across while reading on this topic was Experienced rating. However, I wasn't able to comprehend it well. Therefore, I choose to not write much about it.
Therefore, all and all, a balance needs to be drawn between imperfection and perfection for market to survive.
Palak Jain
17BAL034
Abhilekh Tiwari 17bal066
It is a situation in which there is imperfect knowledge. In most of the cases sellers have more knowledge than buyers. It is necessary for the customer to have knowledge about the product or the services they use lest seller can sometimes dominate the will of the customer by providing him with the wrong information about the service or product.
However this may not last for long because gradually customer will come to know the reality about the product or service then he'll stop using it.
For example if a person goes to doctor and gets unsatisfactory results then he won't be going back there next time. Also he will try to be well informed to avoid such situations.
In the case of insurance there should be proper medical analysis before availing the insurance.
Consequences of asymmetric information can be seen everywhere weather in Indian market or in Indian society it prevails in economic as well as in social system. In a news article by Rabab Khan of gulf news it was written that, Harsh wardhan told Gulf News: “In most relationships, there is a stronger person and a weaker person. The stronger person can exit the relationship easily. So, we may consider the weaker person to be a buyer of the product.”
In his opinion, if asymmetry exists, the couple’s decision-making “will not be rational”, ultimately leading to an unhappy marriage.
As I mentioned the consequences are same everywhere so as in one of the most important concept of society that is marriage.
And we can't escape information failure (asymmetric information).
Even the buyers of some product/service contribute to information failure some or other way. For example: a stock broker being a patient faces asymmetry because Doctor has specialisation and he does not have that much knowledge but being a stockbroker it takes a dominant positions creating asymmetry of information because he has greater knowledge as compared to his clients. One can't have knowledge of every field otherwise efficiency will be reduced so it's natural. Asymmetric information prevails in imperfect market and we do have some measures for overcoming this problem like consumers and competitors have to act as monitor for each other, sellers by giving guarantee,warranty and refunds to the buyers, buyers should have pre purchasing knowledge etc. so as to make adverse selection and moral hazard inoperative to great extent.
Aayushi jain
Division B
17bal065
Information Asymmetry creates market imbalances, and can lead to market failure.It is a phenomenon of imperfect market. When one party has more information of the scheme then other this will lead to exploitation of one by another.If market doesn't have asymmetric information than there will be no chance of exploitation and there will be balance of power through bargain. Due to asymmetric information,market actually runs.Usually sellers have more information about the product than buyers thus they can easily manipulate customers to make a purchase by persuading them through various methods. Like the example given here, as doctors have more specialization in their field and customer doesn't know how this mechanism works and fall easy prey of high fees of the doctors.Thus, asymmetric information can actually regulate the market.
Priyanka Bajpai
17Bal098
A major factor to form different kinds of markets, is the availability of information. If proper information is available to the consumers and the suppliers, the market form tendds towards a perfect market which is a Utopian concept and nearly impossible to attain in reality however desirable. Thus, their asymmetry in the market as related to information or surplus.
Asymmetry is actually better than having information. As it usually said 'Ignorance is bliss'. Asymmetrical information is good for the producers as well as the consumers to some extent.As it increases competition among producers to reduce their cost of production, as well as an anxiety to know the demand of the consumers and they therefore adopt ll measures to reach out to the consumers.The consumers also benefit from this lack of information among different consumers.
At the same time, this lack of information is very harmful for the market, as it can lead to both inflation and depression. The consumers too will not know the actual value of the product and maybe charged exorbitantly which will reduce their welfare.
The only solution to this lopsided availability to information, is opening up the doors to information for everyone by the government. The RTI Act has acted well in reducing this barrier.
Asymmetric information means unequal knowledge between parties in an economic transaction. One party has more knowledge of subject matter than other party. This truth is prevelent and cannot be avoided in current market scenario.
Specialisation and practical skills acquired through knowledge which leads to asymmetric information.
There are two sides of asymmetric information:
The good thing is that it promotes acquiring specialisation and practical knowledge of particular field and this leads to devlopment of human capital. It brings productivity in employment and better services to people.
The dark side is that due to asymmetric information, one party will have an upper hand in transaction which results MARKET FALIURE(situation in which the allocation of goods and services is not efficient).There is possibility of exploitation in economic transaction by using excess knowledge. For example: consumers can be easily misguided by doctor, consultant, merchants, etc because they have special skills and knowledge which their consumer don't have. Consumers only have good faith in professionals and this good faith often leads to exploitation when there is self interest on the part of these professionals.
So, we can arrive at a conclusion that Asymmetric information is good as far as there is no self interest on the part of one party in an economic transaction. If there is self interest, one party exploitation another by using their excess knowledge to get excess benefits.
Tanuj Agarwal
17bbl054
A market situation in which one party to the transaction has greater material information than the other calls for exploitation of the party with lesser or no information who is mostly the consumer. This factor termed as Asymmetric Information leads to various problems in the market. First of all, this concept seems to be beneficial for a short time period but it is actually very harmful in the long run. As sellers might capitalize on the lack of information of the buyers and maximize their profits for some time. But when people would get to know about the actual legal price of those goods and services, it will give rise to discontentment among the consumers which will actually go against the very basic objective of a business of retaining its customers and creating brand loyalty.
Also, a market is identified as a place where both the buyers and sellers have an equal say in their dealings. But with this rising asymmetry, one of the 2 parties gets established at a higher pedestal from where it can dictate its terms. This gives rise to market disparity.
It can be only done away with when people from all sections of the society become aware of this exploitation and understand their responsibility towards the market and the society at large. This can be better understood through the example of Doctors and the healthcare services that they provide. When doctors/ hospitals charge a very high and unreasonable fee from persons belonging to a rich or well-off family. The rich people mostly agree to pay the asked amount without even questioning the authorities or making them accountable for all the expenses. This leads to normalizing of this unfair price which is disastrous as it then leads to multiple exploitative activities. This creates an even larger gap in the haves and have-nots by making even a basic need like proper healthcare service out of their reach. This example stands true for nearly all business activities like Housing, Education, Food Industry, Aviation and other transport industries, Cloth Industry, etc.
Therefore, it is important for a Mechanism called Uniform Pricing to be introduced that describes a reasonable price range in which a good/ service can be sold. This move will ensure the equal existence of market participants by protecting the one who gets exploited. And people also need to play the role of ideal buyers and sellers in order to make the markets accessible to all and all inclusive.
- Aadesh Shinde
17BAL061
Asymmetrical information is prevailing in the society. As mentioned in the article the incomplete knowledge to one of the party leads to this. But I disagree that this leads to market growth. As increasing profit margin by the way of others ignorance is not the desirable structure of market.
As given- when a consumer does not have any knowledge of medical field , Doctors charge them heavy by giving unnecessary treatments.
Asymmetrical information should be avoided and a consumer must be aware of know n how of the product he is purchasing.If not all basic knowledge is must.
Govt. should play it's role by strengthening the already provided platform of consumer forum.
Shreya Abuja
17bal047
Asymmetric information is a reality nowadays and gives an advantage to one party over another one.And also one party has greater material information which exploits second party which has less material information. They are generally consumers.It can be understood with a simple example of Doctors. They charge very high fees by giving them unnecessary treatment to peoples . The main behind this that sellers have the complete knowledge of product and they know how to sell their products to consumers by easily manipulate them.This is clearly a phenomenon of imperfect market in which is easily influenced by another party.To regulate this, Govt. should come up and make certain laws for regulation and from saving innocent consumers from exploitation.
Samyak Jain
17BAL044
It lays a large impact on financial market and capital market because in both of there the parties must have precise knowledge of what they are investing and where they are investing.
I case of financial market if there is no proper connection between buyer and seller then there might be confusion in how much money to lend at how must interests and then what are the final returns. Here either borrowers will fend to engage in risk or the lenders will.
Price of equity is decided when the company shares its financial and other information with the public as public information.Where is human here that the investor is rational and except rational expects rational returns.Price of equity can never be fixed because the investors come up with different information which f gives new estimate to equity.Equity market functionality is thus based on assumption that there is asymmetric information in market and hence every investor will have different views about price of equity. This is normal and expected behaviour because the parameters and variables defining the price of equity are huge and it is difficult for each individual to have same amount of perfect symmetric information
It also depends on the nature of the market whether it is developing or developed. In the developed market the daily fluctuation is around 1% because market here market have strict rules and regulations which are strictly enforced.
Whereas in a developing market the information asymmetry is high and fluctuation is more than 5% which is normal in evolving markets.
17BBL049
It lays a large impact on financial market and capital market because in both of there the parties must have precise knowledge of what they are investing and where they are investing.
I case of financial market if there is no proper connection between buyer and seller then there might be confusion in how much money to lend at how must interests and then what are the final returns. Here either borrowers will fend to engage in risk or the lenders will.
Price of equity is decided when the company shares its financial and other information with the public as public information.Where is human here that the investor is rational and except rational expects rational returns.Price of equity can never be fixed because the investors come up with different information which f gives new estimate to equity.Equity market functionality is thus based on assumption that there is asymmetric information in market and hence every investor will have different views about price of equity. This is normal and expected behaviour because the parameters and variables defining the price of equity are huge and it is difficult for each individual to have same amount of perfect symmetric information
It also depends on the nature of the market whether it is developing or developed. In the developed market the daily fluctuation is around 1% because market here market have strict rules and regulations which are strictly enforced.
Whereas in a developing market the information asymmetry is high and fluctuation is more than 5% which is normal in evolving markets.
17BBL049
Asymmetry Information models assume that at least one party to a transaction has relevant information, whereas the other do not. Some asymmetric information can also be used in situations where at least one party can enforce, or effectively retaliate for breaches of, certain parts of an agreement, whereas the other cannot,whereas in moral hazard ignorant party lacks information about performance of the agreed-upon transaction.Asymmetry information within societies can be created and maintained in several ways. Media outlets, due to their political influences may fail to bring certain viewpoints to the knowledge of people . Furthermore, an educational system relying on substantial tuition fees can generate information imbalances between the poor and the affluent. Imbalances can also be fortified by certain organizational and legal measures, such as document classification procedures. Exclusive information networks that are operational around the world further contribute to the asymmetry. Lastly, mass surveillance helps the political and industrial leaders to amass large volumes of information, which is typically not shared with the rest of the society.
Asymmetry information always have negative effect on less knowledgeable person or who has no knowledge of particular field.This information asymmetry was negatively affecting consumers, businesses and the competitive market in general. Consumers had to make decisions based on partial information. Too often, the only information consumers had access to was the information provided by the same merchants who were trying to make the sale—biased and incomplete information. It was not too long ago when buying a car involved going to a dealer and asking the price and specs of car—with no third party information to reference as a base point. Consumers would often end up paying far above the true value of the automobile. Worse, some hapless buyers ended up with “lemons,” a term coined to describe cars found to be defective only after they had been purchased.
At the same time, honest businesses that sold quality products at reasonable prices would often lose out to their manipulative counterparts who masked products with big-budget marketing ploys and slick salespeople. All this resulted in rewarding companies whose products and services were not actually competitive on a level playing field, a decrease in the quality of products and a market that was not efficient—after-all, an efficient market depends on consumers making rational decisions, and consumers can only make rational decisions when they have full and equal access to the same information that their seller counterparts do.
Mohit paliwal
Roll no. 17BAL090
Information asymmetries tend to be greatest in those areas where information is complex, difficult to obtain or both. For instance, it is relatively difficult to obtain large information asymmetries when trading baseball cards, but it is relatively easier in fields such as law, medicine, technology or finance.
To prevent abuse of customers or clients by specialists, financial markets often rely on reputation mechanisms.The customers of that market are attracted on the basis of market value/reputation of the product.
Information assymetries can be interpreted positive and negative depending upon the market type, customer type and the factors affecting it.
Shubhsmita
17bal051
Information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other.This can be construed as a form of power structure where one party has the knowledge and means to manipulate the decision of the other party.
Usually it's the consumer who has to suffer because of paucity of knowledge. Their decision in most cases is not well informed, for either they don't have sufficient knowledge or the knowledge available is seller-oriented, knowledge marred by sellers interest to maximize his profit. Sellers then enjoy this undue advantage of manipulating the decision of the consumers in their favor.
Knowledge of all the subjects and their technicalities is not practical. Thus what has to be ensured is protection to those people who do not have that knowledge against the whims of the people who possess the power of knowledge.There is a need to introduce a mechanism especially in areas pertaining to health, insurance, education,food where there is a large risk of exploitation of consumers.At the same time it is an imperative for the consumers to realize the importance of being aware and updated.
Kajal Singh
17bal025
The model of perfect competition is based on the assumption of perfect information. But, in reality, no economic participant can have full, efficient, and perfect information. This means that consumers and producers make decisions under uncertainty.In other words, mistakes and errors in business decisions appear if information is incomplete and imperfect. Earlier market failures were ascribed to public goods and externalities. Today a new theory, known as “Economics of Information” has been developed that relates market failure to imperfect and costly information.The problems of adverse selection and moral hazard may arise in the case of incomplete and imperfect information such as old car market, insurance market, and health market.
Market participants, i.e., buyers and sellers, may have different levels of information. One party may have more information about the hidden or unobservable qualities of the product than other participants. For instance, in the second-hand car market, a seller is more informed about the true quality of his car.
He does not like to communicate the true quality of the car to the uninformed or less informed buyers. Sellers have the tendency to exploit the uninformed buyers and, in the process, the buyer draws a selection of goods with relatively less attractive features.Thus, adverse selection arises in market transactions when one party knows more about the quality of the product than the second party, and, as a result, low quality goods are sold in large numbers than high- quality goods. In other words, adverse selection is a tendency of an informed agent to gain more from trading with less informed agent. Adverse selection may, thus, be called a “hidden information” problem.Everybody knows that ‘Smoking is injurious to health’. An insured person may be induced to go on smoking more cigarettes in a day since in case of any eventuality he knows that his costs of treatment will be borne by the insurance company.Because of moral hazard, people act less carefully since they do not have to bear the cost for their carelessness. Moral hazard refers to situations where one of the parties cannot observe the actions of the other party because of incomplete information. Moral hazard may thus be called a “hidden action” problem.
It is impossible to know everything about the behaviour of the party concerned as well as the true quality of the product. Under the circumstance, market exchanges are not efficient. Cheating and fraudulent practices take place. Ultimately, this leads to inefficient resource allocation in the market.
On the other hand, Buyers are often uncertain about product valuations before they commit to purchase. In such situations, firms have an opportunity to influence the accuracy with which buyers can estimate their valuations. When buyers are uncertain about the product's fit with their personal preferences, firms can help resolve this uncertainty by offering product previews, sampling, trials or return guarantees. When a buyer's valuation uncertainty is caused by unpredictability in their consumption state, firms can choose advance selling – which makes buyers decide while they are unsure about their valuations – or enable buyers to make an informed decision by offering spot sales.Prior studies suggest that in this setting, selling to uninformed buyers is advantageous because it presents the firm with a narrower dispersion in valuations, making it easier to extract consumer surplus. Countering this intuition, when the market consists of distinct heterogeneous consumer segments ex ante, selling to privately informed buyers can improve the firm's profit. This is because under certain conditions, the demand curve can become flatter in a relatively high price range as buyers become informed, enabling the firm to extract higher surplus. firms may want to employ product preview mechanisms even when they increase dispersion in valuations while only maintaining (rather than increasing) the mean.
Pragati Mishra
17bal038
Yes, its true that Asymmetric information helps seller to gain more profit and vice versa for a buyer. But according to me now days business is not only about gaining profits. In this dynamic and competitive environment, there are many companies which are setting up examples through CSR( Corporate Social Responsibility) such as Reliance,Tata , Aditya Birla Group etc. Ethics is also part of CSR and Asymmetric information can shatter the ethics of a company. And also for a company it is very important to be accountable and to disclose all sorts of information to survive and creat a brand image in the market. Providing asymmetric information may help in short term period but it’ll only affect adversely in long term period.
Krisha Bhimani
17BBL021
Asymmetric information as disscussed above is the greater knowledge of a particular field to one of the two parties involved in a transaction. This asymmetric knowledge breaks the perfect balance in the market , because the party with greater knowledge takes the advantage over the other party who posses lesser knowledge about the field. Ethics which plays an important role in the country now a days is hampered here because for an individuals benifit one doesn't consider it important to share information with one another .
Big companies like Relience , Tata and many more who are indulged in heavy profit transactions don't support asymmetric knowledge as they already have large profits transactions and not believing in asymmetric profits by sharing information helps them maintaining the trust amongst their customers which is considered more important than profits earned through asymmetric knowledge for this large companies.
So to conclude I would simply say that it is a very controversial topic to give a decision on as eliminating asymmetric knowledge is harmful for small industries and is good for big profit earning industries.
17bbl042
ROHAN PATEL
As people specialize and become more productive in their fields of expertise, along with getting greater levels of value to work they get a edge over their counter part in market.
Asymmetrical market is a reality of today’s era which hampering the perfect market.
It is beneficial for one with greater knowledge who dominates the other.
This creates an imbalance in a transaction.
Most of the times the consumer is at a loss of asymmetrical market.
We can understand this by simple examples:
1. A doctor has an degree in medical science so he possess more knowledge than the patient and thus the patient relies on the material knowledge of doctor.. same is the case with a lawyer and his client.
2. A second hand car dealer: who knows in and out of the vehicle but he can manipulate and potray the information as per his advantage. To find the catch is the responsibility of a customer but in many cases just an overlook is not enough giving benefit to the one with knowledge.
Thus we can conclude that asymmetric information actually regulates the market as per the one who has more knowledge.
Rakshit Kapoor
17BBL037.
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