Asymmetric information is also known as information failure, and that means one party has got more information when compared with other parties in the economic transaction and this would lead to one party gaining an advantage over others. This information failure is what causes an imbalance of power.
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Examples of asymmetric information
An employee working in a company would like to go for job salary hike. The employee may not know how many hikes should be asked for. The reason is that how much employer is willing to pay is known only to an employer.
When a bank decides to fix a price for checking accounts, it will affect high-level account holders and low-level account holders, and this could lead to a situation where a bank may face ire of the public and lose profit in the long run.
When a person who is driving a car feels that his or her car is insured and he starts driving calmly without being bothered about getting involved in a car accident is asymmetric information. The reason is that if a car gets into an accident, then the insurance company would pay for it.
High smoking people may feel like taking insurance, and if insurance companies decide to go for hiking insurance premium then it can affect healthy individuals, and they can drop out of insurance scheme. That is where different insurance premium for various segments of people should be implemented. A student covering asymmetric information homework assignment should grasp these types of examples to get good grasp of the subject.
Assume a shareholder of a company wants to sell the company shares. Assume the shareholder knows some important person of the company and that person has got information that the financial position of a company is not good. This information bulletin would be published in three weeks.
The important person passes on this information to the shareholder, and this becomes asymmetric information. The reason is that shareholder can immediately sale the share and get good profit while other shareholders would burn their fingers.
A person applying for a job can highlight individual skill sets in a resume if he or she gets to know that a particular skill set would gain good marks and would help in getting a job.
Assume a drug company bombarding a set of 50 patients of a doctor on why a drug manufactured by them should be used, and these patients would force doctors to write or prescribe this drug. This is a case of information failure, and student should know about this in asymmetric information homework assignment.
Used car segment is another area in which information failure would be harmful. Assume that a car has been in an accident and has generated some problems that are difficult to find it out. The seller may hide this information from buyer, and that would lead to information failure
An advertisement that we serve the best coffee is another way of attracting customers. Companies would always take this risk with the assumption that many people would not tray any other coffee.
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