Back

Advanced · 3 min

When one side knows more

Information asymmetry occurs when participants have different relevant information. Adverse selection concerns hidden characteristics before a transaction, such as a seller knowing more about a used item’s quality. Moral hazard concerns hidden actions after an agreement. Inspections and contract design can help, though they also have costs.

Practice

A used-car seller knows about a defect that a buyer cannot observe before purchase. Which issue fits best?