About information asymmetry 15, about information asymmetry

What is information asymmetry? The impact is in**.

Information asymmetry refers to the fact that each person in a transaction has different information. In social, political, economic and other activities, some members have information that other members cannot have, resulting in information asymmetry. In market economic activities, there are differences in the understanding of relevant information among various types of people; Those who have more information tend to be in a more advantageous position, while those who are poor in information are in a more disadvantageous position.

Asymmetric information can lead to adverse selection.

In general, sellers have more information about traded items than buyers, but counterexamples may exist. An example of the former can be seen in the sale and purchase of used cars, where the seller knows more about the vehicle being sold than the buyer. The latter example is health insurance, where the buyer usually has more information.

Extended Resources: Possible Issues.

1.People Matter People don't always act in the best interests of the principal. For example, the manager is the leader of all shareholders, but may not always protect the interests of shareholders, and try to maximize his own interests when making decisions.

In the entrustment relationship, due to information asymmetry, the contract between shareholders and managers is incomplete, and it is necessary to rely on the "ethical self-discipline" of managers. Shareholders and managers want to maximize the value of their equity holdings, while managers want to maximize their own utility, so there is a moral hazard between shareholders and managers, and it is necessary to guide and limit managers' behaviors through incentive and constraint mechanisms. This is also the principle of equity incentives.

2.Moral Hazard The information asymmetry state exposes both parties to the transaction "moral hazard" after the transaction is completed. The issue of moral hazard is raised when studying insurance contracts, and economists often use moral hazard to summarize people's "lazy", "free-riding" and opportunistic behavior.

In the governance of listed companies, it is usually manifested in the following three situations: first, violating the loan agreement and changing the use of funds without permission; Second, the borrower conceals investment income and evades repayment obligations; Third, the borrower is indifferent to the efficiency of the use of borrowed funds, irresponsible, and does not work hard, resulting in losses in borrowed funds.

3.Adverse Selection Asymmetric information can lead to adverse selection. This phenomenon was first proposed by Kenneth Joseph Arrow in 1963.

George Akerlof elaborated further on this in his famous book The Market for Lemons in the 1970s. Three American economists, Akerloff, Spence and Stiglitz, were awarded the 2001 Nobel Prize in Economic Sciences for their research on information asymmetric markets and information economics. From an economic point of view, it means that one party to the transaction does not fully understand the other party to the transaction, and the two parties are in an unequal position.

What is information asymmetry? The impact is in**.

What kind of information asymmetry?