4/13/2006

Asymmetric information

I found this blog on the Marginal Revolution that goes along quite well with our in-class discussion of asymmetric information. The idea is that because of asymmetric information you can’t sell a good used car for what it’s really worth. As a result, people with good used cars tend to hold on to them and the percentage of bad used cars on the market goes up. This blog points out one way to get around asymmetric information and why the used car industry doesn’t fail. In the blogger’s own words, “buyers and sellers use testing and certification to remove the most important information asymmetries.” In recent years I have seen lots of used car dealers advertise that they sell certified used car. Like in the experiment last week, the certification is a way of signaling that a car is not a lemon and worth a high price.

7 comments:

Dr. Tufte said...

If you read down in the linked post, they argue that adverse selection is not much of a problem in the real world because people find ways - like warranties - to mitigate it.

alex said...

Asymmetric information poses a problem in all markets, as there will always be one sect who are better informed than the rest.

http://alexmthomas.wordpress.com/2006/10/04/the-economics-of-information/

Dr. Tufte said...

Agreed.

But the point of the original Marginal Revolution piece is to (broadly) apply the Coase theorem: just because asymmetric information exists does not mean that private parties will not contract to reduce or eliminate it.

To the extent that they do this, we should observe lots of institutions to mitigage asymmetric information, but not too many direct adverse effects from AI.

alex said...

Definitely private parties will try to mitigate the asymmetries.

I usually argue, keeping in mind India, so we might be talking about very different problems here. Here, most people dont get the opportunity to make advantage of such private parties.

Dr. Tufte said...

I think we can then both agree that we probably see more asymmetric information problems in India, and more institutions whose role is to mitgate those problems in the U.S.

alex said...

OK.

I strongly feel consumers lose out in the transaction. What do you think?

Dr. Tufte said...

I'm not sure what the question is.

Is it that asymmetric information problems tend to hurt the consumer at the expense of the producer?

If so, I think it depends on the industry: insurance customers almost always benefit more highly from the information they withold from insurance companies.