Asymmetric information is inherent in most (if not all) markets. Let's say, a patient admitted to a hospital probably has less information about illness and recovery options than the doctor. Markets compensate for this by developing agency relationships where both parties are♏ incentivized to produce an efficient outcome.🧸

In this case, the doctor has the incentive to make an accurate diagnosis and prescribe the correct treatment, or else they may be sued for malpractice or otherwise 澳洲幸运5官方开奖结果体彩网:have their reputation suffer. Since doctors and patients have repeat relationships, the law of repeat dealings also shows that both actors a𝐆re better off in the long run🍌 if they deal fairly with one another.

The Market for Lemons

澳洲幸运5官方开奖结果体彩网:Free markets only work according to economic models if the information offered is perfectly understandable and all parties know all that is available. This is called symmetric information—buyers and sellers, producers and consumers, borrowers and lenders all have the same complete information. But, 澳洲幸运5ꦗ官方开奖结果体彩网:sellers typically know more than buyers about the products and producers know more about 💝their goods than consume𒈔rs.

The Lemons Problem

The 澳洲幸运5官方开奖结果体彩网:lemons problem refers to issues that arise due to 澳洲幸运5官方开奖结果体彩网:asymmetric information possessed by the buyer and the seller. The lemons problem was first put forward in a research paper, The Market for 'Lemons': Quality Uncertainty and the Market Mechanism, written in the late 1960s by George A. Akerlof, an economist and professor at the University of California, Berkeley.

The tag phrase identifying the problem came from the example of used cars Akerlof used to illustrate the concept of asymmetric information, as defective used cars are commonly referred to as lemons.

The lemons problem exists in the marketplace for both consumer and business products (and in investing) related to the disparity in the perceived value of investment between buyers and sellers. The lemons problem is also prevalent in the financial sector, including insurance and 澳洲幸运5官方开奖结果体彩网:credit markets.

For example, in the realm of 澳洲幸运5官方开奖结果体彩网:corporate finance, a lender has asymmetrical and less-than-ideal information regarding the a🗹ctual creditworthiness of a borrow♔er.

Asymmetric Information and Adverse Selection

According to economic theory, asymmetric information is most problematic when it leads to 澳洲幸运5官方开奖结果体彩网:adverse selection in a market. Consider life ins🐈urance where a customer may have information about their risk that the insurance company cannot easily obtain.

To compensate for a lack of information, the insurance company may increase all premiums to offset the risk of uncertainty. This means that the riskiest individuals (who ostensibly value insurance most highly) effectively price ou🌌t some of the less risky individuals (who aren't willing to pay as much).🃏

Adverse selection theoretically leads to a sub-optimal market even when both parties in an exchange are dealing rationally. This sub-optimality, once understood, provides an incentive for 澳洲幸运5官方开奖结果体彩网:entrepreneurs to assume risk and promote a more efficient outc𓆉ome.

Methods for Addressing Adverse Selection

There are a few broad methods of addressing the adverse selection problem. We've listed some of the most common ones below.

Warranties, Guarantees, Refunds

One very clear solution is for producers to provide warranties, guarantees, and refunds. This is particularly notable in the used car market. In addition to♐ seller-granted warranties, third-party companies can offer their own warranties in the form of insurance that comes at some cost to the consumer.

The government can also step in to regulate the quality of goods sold. In most states, there are "澳洲幸运5官方开奖结果体彩网:lemon laws" where a consumer can return a faulty us🔴ed car to the dealer no questions asked within a certain initial period if it turns out to be a piece of junk.

Monitoring

Another intuitive and natural response is for consumers and𝓡 competitors to act as monitors for each other. For instance:

• Consumer Reports, 澳洲幸运5官方开奖结果体彩网:Underwriters Laboratory, notaries public, and online review services such as Yelp help bridge gaps in information.
• Seller ratings on eBay and Amazon.
• Uber driver reviews, and product ratings are all examples of crowdsourcing reputation in this way.

Online reputation management (ORM) software solutions allow 🌱companies to track what consumers say about a brand on review sites, social media, and search engines.

Mechanism Design Theory

The study of efficient market arrangements is known as 澳洲幸运5官方开奖结果体彩网:mechanism design theory, which is a more flexible offshoot of 澳洲幸运5官方开奖结果体彩网:game theory. Notable contributors include Leonid Hurwicz, Eric S. Maskin, and Roger B. Myerson.

The Bottom Line

Information in a financial transaction tends to be asymmetric. This means that one party—usually the seller—has more information about the product or service than the buyer. Realistically, it isn't possible to ensure that both parties have the same amount of knowledge. But, there are ways to ensure that transactions are fair for both parties. Legislators can enact regulations and sellers can offer guarantees, warranties, and refunds to remedy any problems consumers may encounter. This gives buyers recourse even if they may not be privy to information before they make a purchase.