Asymmetric Information
Also known as · information asymmetry · private information
Asymmetric information arises when different agents in a market hold different private information — one side knows something the other cannot observe or verify. Unlike pure uncertainty (where all agents share the same ignorance), asymmetric information gives the informed party a strategic advantage and changes how both sides behave.
Classic examples from the lectures include: a used-car seller who knows the car's condition while the buyer cannot, an insurance applicant who knows their own health status, a loan applicant who knows their repayment likelihood, and an entrepreneur with private knowledge of their firm's value. See Topic 1 — Asymmetric Information for the full development.
When to use
Asymmetric information is the organising framework whenever one side of a transaction has private information the other cannot verify. It motivates the three main mechanisms studied in Topic 1: Adverse Selection (pre-contractual quality hidden from the uninformed buyer), Moral Hazard (post-contractual hidden action), and Signaling (the informed party sending a credible costly signal to bridge the gap).