This looks at how imperfect information can lead to negative economic outcomes. Examples include where a second hand car salesman knows the car has a fault, but because the consumer doesn’t know, they are willing to pay a higher price.
Asymmetric information or information asymmetry is where one party in a transaction has more information than the other. In other words, the seller of a good may know more about its true worth than the consumer of that good.
The Principal Agent Problem occurs when there is a conflict in interest between ‘the principal’, and ‘the agent’. The principal refers to the individual that delegates authority and responsibility to the agent. So the agent acts on behalf of the principal. The problem then arises where the interests of the agent and the principal do not align.
Adverse selection is where one individual in a transaction has more information about the good than the other.
