Asymmetric Information: Problem, Examples, and Solutions

This assignment delves into the concept of asymmetric information in economics, highlighting situations where one party possesses more information than the other, leading to potential market inefficiencies. The paper discusses the core problem of asymmetric information, with a focus on how it can lead to adverse selection and other negative consequences, using recruitment processes as an example. The assignment emphasizes the importance of understanding asymmetric information and its impact on decision-making, especially in scenarios involving risk and uncertainty. The paper provides an overview of how the problem manifests, and why it is critical to understand the implications of this information asymmetry.

Running head: ASYMMETRIC INFORMATION
Asymmetric Information
Name of the Student
Name of the University
Author’s note

1ASYMMETRIC INFORMATION
Introduction to Asymmetric Information
The concept of Asymmetric Information revolves around a situation where the
information shared between two parties in transaction is incomplete or uneven. In such a case
one of the parties has a better knowledge than the other party in transaction (Courtney, Dutta
& Li, 2017). Any economic trade generally consists of asymmetric information which might
also be referred to a “information failure”. Problem of Asymmetric Information
In many companies, the accurate as well as appropriate information regarding the job role is
not manifested completely while carrying out the recruitment process (Courtney, Dutta & Li,
2017). If there has to be any alliance in future, the information regarding every regulation and
policy of the company must be shared appropriately with the candidate.
In general cases of asymmetric information, there are negative consequences that occur due
to uneven information shared between buyers and sellers (Cui, Jo & Na, 2018). The first
negative phenomenon could be adverse selection. In such a case, the seller in the process of
transaction has more information than the buyer and exploits the information to his own
advantage, creating risks and losses for the buyer.
Importance of the Problem
The problem of asymmetric information is very critical as the buyer gets exploited
due to this situation and becomes exposed to risks. Many examples can be highlighted in this
context (Cui, Jo & Na, 2018).The insurance companies suffer from the expected loss that
occur due to information asymmetry at the time of the sale of the policy. The information
asymmetry indulges one party to make well-informed decisions from beforehand. The
preferences of the other party are completely neglected.

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Explanation of the Problem through examples
In the recruitment of the personnel of the police department, there is a requirement of
a college degree. It might be found that this job role rarely requires materials studied during
college courses. This might be a severe case of information asymmetry where the job role is
not perfectly suited to the candidate and the candidate is not benefitted (O'Donoghue &
Somerville, 2018). This happens due to the risk aversion mentality of the concerned
department, where the authorities prefer to gamble over a particular outcome of higher
expected value.

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References
Courtney, C., Dutta, S., & Li, Y. (2017). Resolving information asymmetry: Signaling,
endorsement, and crowdfunding success. Entrepreneurship Theory and
Practice, 41(2), 265-290.
Cui, J., Jo, H., & Na, H. (2018). Does corporate social responsibility affect information
asymmetry?. Journal of Business Ethics, 148(3), 549-572.
O'Donoghue, T., & Somerville, J. (2018). Modeling risk aversion in economics. Journal of
Economic Perspectives, 32(2), 91-114.