Asymmetric Information

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  • Information is asymmetric when material information is not generally shared with all participants in a market. This means that, in the credit market, for example, borrowers may have valuable information that lenders do not have but that might be critical to make informed decisions. Borrowers typically like to present themselves in the most favorable light to secure a loan and might therefore conceal or distort unfavorable information. By so doing, they put lenders at a disadvantage. Technological innovation has, however, made it possible to minimize disparities in access to quality information.

    Asymmetric information can lead to adverse selection and moral hazard. Adverse selection occurs when poor-quality participants or goods in a market are treated much more favorably because of skewed or unbalanced information. The sale of ...

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