Victor Claar: Would You Rent Your Car Here? (On asymmetric information.)
… Most of the time, in a market of any kind, both potential trading parties know exactly what they will be getting from the exchange. When you buy a cup of coffee, especially from a vendor you know and trust, you know what you will be getting (the coffee), and the barista knows what she will be getting (your money). Moreover, once the money and coffee have been handed over, both of you are the better for it. You obviously wanted (needed?) the coffee more than your money, and the barista was much more interested in your money than in keeping the coffee for herself.
Economists love these kinds of interactions, by the way. Two people are now happier (you, with your hot caffeine jolt) and the barista (with your money, and hopefully a nice tip besides). As evidence, the two of you probably both say, "Thank you." And life goes on for the rest of us, in our ignorant bliss.
But there are some markets where potential buyers and potential sellers do not both have access to all of the information relevant to a potential transaction. That's a case of "asymmetric information" (see above)….
Leave a Reply to phil_styleCancel reply