In the presence of asymmetric information,
A) all contracts are efficient.
B) efficiency in risk bearing cannot be achieved.
C) a trade-off exists between risk-bearing efficiency and production efficiency.
D) no contracting will take place.

Question

Quizplus · Accepted Answer

Asymmetric information means that one party has more information than the other, which can result in adverse selection or moral hazard problems. In such situations, achieving both risk-bearing efficiency and production efficiency may not be possible, and a trade-off likely exists between the two. Therefore, choice (C) is the best answer. Choice (A) is incorrect because not all contracts are efficient in the presence of asymmetric information. Choice (B) is incorrect because efficiency in risk bearing can be achieved, but not without a trade-off with production efficiency. Choice (D) is incorrect because some form of contracting (even if not perfect) is still likely to take place, despite the presence of asymmetric information.

In the Presence of Asymmetric Information