Information asymmetry

This property was first noted by Kenneth Arrow in a 1963 article entitled "Uncertainty and the Economics of Welfare in Health Care" in the journal American Economic Review.

George Akerlof in his work “ The market of lemons: the uncertainty of quality and the market mechanism ” ^[1] in 1970 built a mathematical model of the market with imperfect information. He noted that in such a market, the average price of a product tends to decline even for products with perfect quality. There are possible options for the development of a situation in which such a market completely disappears.

In pursuit of their goals, dishonest sellers can offer less quality (cheaper to manufacture) goods, deceiving the buyer. As a result, many buyers, aware of low average quality, will avoid purchases or agree to buy only at a lower price. Manufacturers of quality goods in response, in order to separate in the eyes of the consumer from the average seller and retain the market, can start brands, certification of goods. The important role of brands in a developed market economy is to serve as a sign of consistent quality.

Consumers, evaluating the quality of products, make up the reputation of markets and sellers. The advent of the Internet has greatly facilitated the process of exchanging information among consumers. By allowing you to know directly the characteristics of the product or its reputation, the Internet reduces the asymmetry of information.

Michael Spence proposed a theory of signaling . In a situation of asymmetric information, people indicate what type they belong to, thereby reducing the degree of asymmetry. Initially, a job search situation was selected as a model. The employer is interested in recruiting trained / trained personnel. All applicants, of course, say that they are perfectly capable of learning. But only the applicants themselves have information about the actual state of things. This is the situation of information asymmetry.

Michael Spence suggested that graduation, for example, from the institute serves as a reliable identification signal - this person is capable of learning. After all, graduating from an institute is easier for someone who is able to study and, therefore, is suitable for this employer. And vice versa, if a person could not graduate from an institute, his learning abilities are highly doubtful.

One of the most studied varieties of information imperfections is asymmetric information on the market. Asymmetric information is a situation in which some of the participants in the transaction have important information that other participants in the transaction do not have.

Markets with asymmetric information are markets in which some participants know more about products than others. As a rule, the seller of the product knows more about the product than the buyer. Due to the asymmetry of information, low-quality products will crowd out high-quality products from the market. This phenomenon is usually defined as negative selection. It consists in the fact that in conditions of asymmetric information, participants in transactions differ for the worse from those who do not participate in them. Example: insurance market . A high degree of risk displaces a low degree of risk from the insurance market. Insurance companies raise the price of insurance to reduce the number of healthy people being insured.

Negative selection in markets with asymmetric information leads to the displacement of high-quality goods by lower-quality goods. Thus, markets for quality goods are at risk and may disappear. This implies the indispensable need to combat the asymmetry of the market. To reduce the effect of negative selection, various market signals are used, which strive to ensure the implementation of two principles:

1. The principle of inaccessibility of falsification, that is, the signal of a market participant will be trusted by other participants if it is very difficult (or impractical) to fake it.
2. The principle of full disclosure. If some individuals use signals corresponding to favorable information about them, then their rivals will be forced to disclose their information, even if it is not so favorable.

In addition to standardization and certification , a huge influence on the market is exerted by the company's reputation as a supplier of high quality products. The state should make every effort to promote the emergence and development of firms that care about product quality.

There are several main problems that arise in financial markets due to information asymmetries:

• adverse selection problem;
• moral hazard risk problem;
• the problem of costly state verification.

Blogs play an important role in reducing the impact of insider trading . According to some experts, financial blogs provide data that reduces information asymmetries between corporate insiders and insider trading. Blogging on financial websites provides connectivity with investors, analysts, journalists and scientists. Financial blogs prevent people in power from retaining financial information from the general public. Compared to traditional forms of the media, such as newspapers and magazines, blogs provide a convenient place to provide information to the public. ^[2]

Studies of the effect of artificial intelligence on the theory of asymmetric information indicate that artificial intelligence agents reduce the degree of information asymmetry, and therefore the market where these agents are used is more efficient than when they are not used. It is also noted that the more artificial intelligent agents used in the market, the less the influence of trading on the market, since information asymmetry facilitates the trade in goods and services. ^[3]

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