Information asymmetry
Also called: asymmetric information, adverse selection, market for lemons
Information asymmetry is when one side of a deal knows more than the other. It can cause adverse selection, where bad products or risks drive out good ones.
George Akerlof's 1970 paper on used cars, 'The Market for Lemons', showed how buyers who can't tell good cars from bad offer less, which drives good cars out of the market.
Related terms
- Moral hazard: Moral hazard is the tendency to take more risk when someone else bears the cost if things go wrong, such as a bank expecting a bailout or a driver who is fully insured.
- Market failure: Market failure is when a free market, left alone, doesn't produce the efficient outcome.
- Efficient market hypothesis: The efficient market hypothesis says stock prices already reflect all available information, so no one can consistently beat the market except by luck or by taking more risk.
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