Concept: imperfect information

Imperfect information is a situation in which the parties to a transaction have different information, as when the seller of a used car has more information about its quality than the buyer. Sellers often have better information about a good than buyers because they are more familiar with it. They know more about its quality, durability, and other features. Buyers, in contrast, have limited contact with the commodity and thus have less information. Another common example of asymmetric information occurs in the labor market. Workers are knowledgeable about their skills, industriousness, and productivity. Employers, in contrast, have limited information about the quality of prospective workers. Another good example is the insurance market. Insurers often have less information about the risks taken by their clients, and in fact, insurance may alter a person’s behavior.

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The Alternate Side

imperfect information | moral hazard