What is Information Asymmetry?
Information asymmetry (asymmetric information) refers to a situation in which parties involved in a transaction possess different levels of information. In socio-political and economic activities, some members possess information that others cannot access, leading to an imbalance in information. In market economic activities, different individuals have varying degrees of understanding about relevant information; those with more comprehensive information often hold a more advantageous position, while those with limited information are at a disadvantage. Asymmetric information may lead to adverse selection.
Generally, sellers possess more information about the traded goods than buyers, but counterexamples also exist. The former can be seen in the sale of used cars, where the seller knows more about the vehicle than the buyer. The latter example is health insurance, where the buyer typically has more information.
The market economy has developed for centuries under conditions of information asymmetry. Before the theory of information asymmetry was discovered—for instance, during Adam Smith's era—the market did not appear to have significant flaws. Smith even praised the "invisible hand" to the utmost, and proponents of free-market economic theory advocated for market self-regulation and opposed government intervention.
Today, information economics has gradually become the mainstream of new market economic theories. Only after people abandoned the assumption of complete information in free markets did they realize the severity of information asymmetry. Overnight, "lemons" were everywhere, and scholars studying information economics were awarded the Nobel Prize in Economics in 1996 and 2001. James Mirrlees and William Vickrey in 1996, and George Akerlof, Michael Spence, and Joseph Stiglitz in 2001, all received the Nobel Prize for their research on information economics.
Information economics argues that information asymmetry creates an imbalance of interests between market participants, affecting societal fairness, justice, and the efficiency of resource allocation in markets. It also proposes various solutions. However, it is evident that information economics is based on empirical analysis of existing economic phenomena, and its application to real-world problems remains experimental. For example, buyers always know less about the product they purchase than the seller, so sellers can leverage their informational advantage to gain rewards beyond the product's value. Transactional relationships turn into principal-agent relationships due to information asymmetry, where the party with the informational advantage is the agent, and the disadvantaged party is the principal. The two sides are essentially engaged in an endless game of information.
In fact, those who possess information gain an advantage in transactions, which is essentially a form of information rent. Information rent serves as the link connecting every transaction. Every industry is an aggregation of specialized information: producing a product requires engineers' professional knowledge, technicians' expertise, and salespeople's market insights. Turning a product into a tradable commodity requires merchants' specialized channel and pricing information. As the saying goes, "Different trades are separated as by mountains," where the "mountain" is essentially information asymmetry. Acquiring such information comes at a cost. Asymmetric information can be viewed as the disparity in investment in information costs. Consumers often do not invest in information such as production details, creating a cost disparity between them and producers.
Producers exploit this disparity to earn profits, compensating for their prior investment in information. This is ultimately another manifestation of capital's profitability, albeit observed from a different perspective.
In market economic activities, different individuals have varying degrees of understanding about relevant information; those with more comprehensive information often hold a more advantageous position, while those with limited information are at a disadvantage. The theory of information asymmetry was proposed by three American economists: Joseph Stiglitz, George Akerlof, and Michael Spence.
In markets, sellers generally know more about the product than buyers; the better-informed party can benefit by conveying reliable information to the less-informed party; the less-informed party in a transaction will strive to obtain information from the other side; market signaling can, to some extent, mitigate information asymmetry; information asymmetry is a flaw in market economies, and to reduce its harm, governments must play a strong role in the market system.
The theory of information asymmetry explains many market phenomena, such as stock market fluctuations, employment and unemployment, credit rationing, product promotion, and market share. It has become the core of modern information economics and is widely applied across various fields, from traditional agricultural markets to modern financial markets.
