Definition: It refers to a situation in which a person has more information than another person. In this situation, one side can take advantage of the other side’s lack of information. Thus, it will lead harmful problems such as adverse selection (immoral behavior that takes advantage of asymmetric informationbefore a transaction) and moral hazard (immoral behavior that takes advantage of asymmetric information after a transaction).
For example, consider a potential buyer of Company ABC shares and the seller of those shares. If the seller knows the CFO’s friend and has heard that the company is facing undisclosed financial problems, then the seller has asymmetric information. The seller is taking advantage of the buyer’s lack of knowledge, and thus the buyer will lose money.