Which of the following relationships involves asymmetric information?
A) An employee knows more than his employer knows about his work effort.
B) A borrower knows more than the lender about his ability to repay the loan.
C) The seller of a 30-year-old house knows more than the buyer about the condition of the house.
D) All of the above are correct.

Question

Quizplus · Accepted Answer

All three options involve situations where one party possesses information that the other party does not possess or would only be able to obtain at a significant cost. In option A, the employer must rely on the employee to provide accurate information about the amount and quality of work done, which the employee may not be fully forthcoming with. In option B, the lender cannot observe the borrower's actual income or spending habits but must rely on the borrower's self-reported information, which may be misleading or incomplete. In option C, the buyer cannot possibly be aware of all of the defects and maintenance issues that may affect an older house, which only the seller would know about.

Which of the Following Relationships Involves Asymmetric Information