<aside> đź’ˇ Situation in which a buyer and a seller possess different information about a transaction.
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Form of market failure resulting when products of different qualities are sold at a single price because of asymmetric information, so that too much of the low-quality product and too little of the high-quality product are sold.
mechanism through which sellers and buyers deal with the problem of asymmetric information
When a party whose actions are unobserved can affect the probability or magnitude of a payment associated with an event.
For example, if I have complete medical insurance coverage, I may visit the doctor more often than I would if my coverage were limited. If the insurance provider can monitor its insurees’ behavior, it can charge higher fees for those who make more claims. But if the company can- not monitor behavior, it may find its payments to be larger than expected. Under conditions of moral hazard, insurance companies may be forced to increase premiums for everyone or even to refuse to sell insurance at all.
problem arising when agents (e.g., a firm’s managers) pursue their own goals rather than the goals of principals (e.g., the firm’s owners)