asymmetry of information

asymmetry of information

a situation where the parties to a CONTRACT or TRANSACTION have information available but this information is unevenly distributed between the parties. This information could include the identity of alternative suppliers or customers or product quality or performance. Asymmetry of information is likely to lead to ADVERSE SELECTION or to MORAL HAZARD in transactions. Asymmetric information also applies to the principal-agent relationship (see AGENCY COST) where the principal cannot observe the agent's level of effort. See PRINCIPAL-AGENT THEORY.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005