What is Asymmetric Information?

Asymmetric information, also known as “information failure”, occurs when one

party to an economic transaction possesses greater material knowledge than the
other party.
Asymmetric information typically manifests when the seller of a good or service
possesses greater knowledge than the buyer; however, the reverse dynamic is
also possible. Almost all economic transactions involve information asymmetries.

Examples of Asymmetric Information

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.

Asymmetric information in assurance

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.

Asymmetric labor in markets

When employing a worker, a firm doesn’t know how hard the worker will work.
The employer can look at his CV and past references, but once employed he cannot
guarantee the attitude of the worker.

Asymmetric information in share leading

Managers of companies may have inside knowledge about the fortunes of the
company. With this knowledge, they may know the share of the company is either over-
valued or under-valued-.compared to market price.
This is why insider-trading is illegal as managers could use their greater
knowledge to make a profit out of unknowing share traders.