What is information asymmetry?

Information asymmetry means that one party in a transaction has better or more facts than the other. It matters because the less-informed side protects itself in ways that can shrink or break the market.

How it works

A seller usually knows the true quality of a product, a borrower knows how risky they are, and an insurance customer knows their own habits. The other side cannot check, so it prices for an average case. Good sellers, safe borrowers and careful customers then find the price unattractive and leave.

This leaves a pool of worse-than-average cases, which pushes the price up again, and the cycle continues. The result can be a thin market or none at all. Remedies include warranties, credit histories, inspections and public ratings, which each reduce the gap by making hidden facts visible.

Example

Say a market has used machines of two kinds in equal numbers, good ones worth 100 and poor ones worth 60. Buyers cannot tell them apart and will pay at most the average, 80. Owners of good machines refuse to sell at 80, so only poor machines are offered. Buyers realize this and now offer 60. The good machines never sell, and the market has lost trades that would have helped both sides. The figures are an illustration.

How to model it in Machinations

Create a Source that produces machines and a Gate that sets the share that are good, using a probability Lever. Use a Register for the buyers' offer, calculated from the average quality of what is for sale, with a state connection to the owners' willingness to sell. Add a Pool for machines sold. Play with a Lever that reveals quality, such as an inspection, and chart sales with and without it.