One party in a transaction has more or better information than the other.
Akerlof, Spence and Stiglitz shared the 2001 Nobel for the three mechanisms it produces: adverse selection, signalling and screening. Nearly every institution in insurance, credentialing and warranty exists because of it.
In practice
- A buyer knows the delivery date is firm and the seller knows it is not, and the whole negotiation is about that gap.
- A landlord knows the boiler's history and the tenant does not, which is what the deposit and the survey exist to price.
- Further reading
- Wikipedia
- Subject
- Economics & Incentives
- Essay
- The theories behind every argument about money