The study of Information Economics represents how information affects an economy and economic decisions, e.g., a worker might have a better idea of his capabilities than his employer does; managers know more about investment prospects than stockholders or investors. This asymmetric information typically leads to economic inefficiencies. Many applications exist in IO, management, finance, accounting, insurance and marketing.
The Models of Information Economics- Moral Hazard
Moral hazard is an exceptional case of information asymmetry. It transpires when an economic agent has more information about its actions or intentions and has a tendency or incentive to behave inappropriately from the perspective of an economic agent with less information. The Moral Hazard doctrine inculcates the principal–agent problem model that solves the difficulties emerging under conditions of incomplete and asymmetric information; when a principal hires an agent, the two may not have the same interests, while the principal is hiring the agent to trail the interests of the former.
Adverse Selection
A classic illustration of the adverse selection principle was offered by George A. Akerlof in the Nobel Prize winning article "The Market for Lemons: A Personal and Interpretive Essay" published in the Quarterly Journal of Economics in 1970.
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