📚 Topic Summary
Information asymmetry exists when one party in a transaction has more or better information than the other. This imbalance can lead to market inefficiencies and unfair outcomes. For example, a seller might know more about the quality of a used car than the buyer, or a borrower might have a better understanding of their ability to repay a loan than the lender. Understanding information asymmetry is crucial for making informed decisions in economics and personal finance.
🧠 Part A: Vocabulary
Match the term with its correct definition:
- Term: Adverse Selection
- Term: Moral Hazard
- Term: Signaling
- Term: Principal-Agent Problem
- Term: Information Asymmetry
- Definition: One party takes on more risk because someone else bears the cost of that risk.
- Definition: The problem that occurs when one person (the agent) is allowed to make decisions on behalf of another (the principal).
- Definition: Situation where one party has more information than another.
- Definition: The process of conveying information about oneself to another party.
- Definition: When asymmetric information leads to the selection of undesirable individuals.
Match the terms with the definitions. For example: 1-C, 2-A, etc.
✍️ Part B: Fill in the Blanks
Information asymmetry can lead to ________ ________, where one party takes on more risk because they do not bear the full cost. This is often seen in insurance markets. Another consequence is ________ ________, where individuals with higher risks are more likely to seek insurance. To mitigate these issues, strategies like ________ and ________ ________ are employed.
🤔 Part C: Critical Thinking
How can information asymmetry affect the stock market, and what measures can be taken to reduce its impact on investors?