Asymmetric information occurs when

Question

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Asymmetric information is a concept that refers to situations where one party in a transaction has more or better information than the other party. In choice A, it is a classic example of asymmetric information whereby buyers and sellers may have different or limited information on the quality of what they are buying/selling. In choice B, banks are faced with adverse selection, a phenomenon that occurs when borrowers with higher risk tendencies have more incentive to seek out loans than low-risk borrowers. This implies the bank is at a disadvantage as they are unable to differentiate between high-risk and low-risk borrowers. Choice C refers to moral hazard, a situation where borrowers undertake riskier investments because they have less to lose in the use of borrowed funds. All three choices imply that one party in the transaction has an information advantage over the other, which results in one or more sub-optimal outcomes for the disadvantaged party. Therefore, choice D, all of the above, provides the best representation of asymmetric information.

Asymmetric Information Occurs When