Imagine this: You walk into a used car showroom to make a purchase. The seller knows more about the quality of the car than the potential buyer. If the seller wants to make a quick sale, he or she might be willing to sell the car at a price that is below the market value. But, the customer is left thinking whether this is because the car is of bad quality.
This scenario was painted by Christian Haefke, the head of the economics department at New York University Abu Dhabi. This is what asymmetric information is: when one person in an economic transaction knows more than the other. However, Haefke clarifies that this situation could be overcome if the seller offers some kind of warranty. But, it would not be feasible in transactions between people.
He said: “Asymmetric information exists everywhere and affects every relationship. For example, if a student receives a failing grade, did the student study hard and experience an unfortunate event, like the loss of a loved one, that distracted him? Or did the student not prepare for the exam? A teacher might want to react to the two different reasons very differently.”
