Information Asymmetry

What it is

The asymmetry is not about dishonesty, which is why it is a structural idea rather than a moral one. A mechanic genuinely knows more about your car than you do, and that is the point of employing one. The difficulty is that the person diagnosing the problem is usually the person selling the solution, and you have no independent way to assess either.

Economists distinguish degrees of it by when verification becomes possible. Where it never does, the good is a credence good and the market has characteristic failure modes: undertreatment, overtreatment, overcharging, or no functioning market at all.

In effect

What follows is a ranking of remedies that cuts against instinct. Dulleck, Kerschbamer and Sutter tested four of them with 936 participants and found liability doing the work, verifiability barely registering, reputation having little influence, and competition making the market cheaper and busier without making it better at delivering the right treatment.

It also explains a finding from a different literature. Bolton, Warlop and Alba found consumers believing prices are substantially above fair prices and only modestly moved by being shown the costs. Under asymmetry that is not irrational: a buyer who cannot verify the cost base has no way to update, so the prior stands.

What it does not say

It does not say markets cannot work. Most goods are search or experience goods and verification arrives soon enough to discipline sellers.

It does not tell you which sellers to distrust. It describes a condition that applies to a category of purchase, not to a person.

And the experimental ranking of remedies is from a modelled market. Whether liability disciplines real trades as cleanly as it disciplines a laboratory game is a separate question these papers do not settle.

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