In financial markets, when does asymmetric information exist?

Question

Quizplus · Accepted Answer

Asymmetric information exists when one party has more knowledge or information about relevant details than the other party in a transaction. This can create an imbalance of power and can lead to adverse selection and moral hazard in markets. Option B is also true to some extent, but it is a specific case of asymmetric information where the lender has more information about the borrower's creditworthiness and ability to repay the loan than the borrower does. Option C is not correct because it assumes that all parties have the same information, which is rare in real-world markets. Option D is also not correct because even if the information held by the parties is inaccurate, it can still create an asymmetric information problem if one party is more aware of the inaccuracies than the other party.

In Financial Markets, When Does Asymmetric Information Exist