The theory of asymmetric information was developed in the 1970s and 1980s as a plausible explanation for common phenomena that mainstream economics couldn’t explain. In simple terms, information asymmetry means that two parties to an economic transaction have different information about the goods or services being exchanged. This creates an imbalance of power. Problems related to information asymmetry are adverse selection and moral hazard. Adverse selection refers to a process in which undesired results occur when one party has more or better information. And moral hazard is a situation where one party has information advantage, they may have the incentives to use that advantage to exploit the other party.
Asymmetric information starts the downward economic spiral. A lack of equal information causes economic imbalances that result in adverse selection and moral hazards. All of these economic weaknesses have the potential to lead to market failure. A market failure is any scenario where an individual or firm’s pursuit of pure self-interest leads to incefficient results.
Information asymmetry is not only present between buyers and sellers of a product, but also at the car garage, the dentists, with a health insurance or in politics. The political candidates running for election are the ones with the better and more information and representative voters are taking the risks.
When elections are called, politicians and their supporters attempt to influence policy by competing directly for the votes of constituents in what are called campaigns. The message of the campaign contains the ideas that the candidate wants to share with the voters. With these messages the candidates try to convince the voters that they are the best and most suitable candidate. The voters would likely want to support politicians who are competent, serve public interest as well as follow the law and social norms. But among the candidates there may be some who are less suitable, even ill-intentioned. The voters can never be perfectly informed about the real abilities and intentions of the political candidates. There will always be some degree of uncertainty with reference to the characteristics of the political candidates. This is information asymmetry.
While exercising power, politicians are increasingly exposed to temptation. One of the greatest temptations is for politicians to use their position in service of their own ambitions instead of the promises they made during the campaign and to use their status and influence to their own personal advantage, or to serve the interests of friends, family, or business partners, while gradually forgetting about public interests.
Possible solutions for adverse selection and moral hazard in economic transactions are inspections, warranties, modify incentives and making the asymmetry smaller by looking information up. But what about politics? The other candidates and the media already try to inform the voters, which is also not always truthfully. Is there a way to reduce the asymmetry? Or should we just trust that the candidates serve the public’s interest?
Sources:
https://en.wikipedia.org/wiki/Information_asymmetry
http://www.investopedia.com/terms/a/asymmetricinformation.asp
http://thismatter.com/money/banking/information-asymmetry.htm
Click to access szanto_toth_2012_inf_asymmetry_corruption_121017.pdf
http://www.investopedia.com/ask/answers/052115/do-any-markets-not-exhibit-asymmetric-information.asp
https://en.wikipedia.org/wiki/Political_campaign
Dear Megan,
interesting post. I always find it is hard to determine the truthfulness of a candidate. I wonder how this type of information asymmetry can be reduced.
There are a few existing websites, such as factcheck (http://www.factcheck.org/) where people can check the accuracy of claims made by the presidential candidates of USA. I think those kind of sites could be beneficial for voters while deciding who to vote. Although it is still hard to say whether the information on those sites is manipulated by supports of one candidate. What do you think?