Economic decisions depend on the information available. When the parties know different things, adverse selection, moral hazard, distrust and inefficient contracts appear, and information systems can either reduce or concentrate those asymmetries.
Educational and informational content. It is not legal advice, guidance for a specific case or an institutional position. Examples and analyses use only legitimate sources and public data, aggregated or properly anonymised.
Economic decisions depend on the information available to consumers, firms and governments. When one party knows relevant aspects that the other cannot observe, prices and contracts may fail to reflect adequately the quality, the risk or the behaviour involved in the transaction. Problems of trust then arise, along with choices that would be different if information were more evenly distributed.
Adverse selection occurs before the contract. In the classic example of the used-car market, the seller knows the quality of the vehicle better than the buyer. If the buyer has no reliable signals to tell products apart, they tend to offer an average price. That price can drive away sellers of higher-quality goods and lower the average quality of the market itself.
Moral hazard appears after the contract, when one party can change its behaviour without the other being able to observe it fully. Situations of this kind are common in insurance, credit, employment relationships and outsourcing. Contracts, audits and monitoring mechanisms seek to reduce the problem, but they also generate costs and can create unwanted incentives.
Signalling and screening are responses to information asymmetries. Degrees, certifications, warranties, ratings and track records provide signals about characteristics that cannot be directly observed. Information systems expand this capacity by organising records, easing verification and producing indicators. The same technology, however, can concentrate data in a few hands and widen informational inequality, especially when automated criteria are not transparent.
For that reason, information has economic value because it changes choices and outcomes. Well-designed systems can therefore reduce uncertainty and improve decisions, provided that the expansion of informational capacity comes with transparency, data protection and criteria of use compatible with the rights of those involved.
Further reading
- Akerlof, G. A. (1970). “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism”. Quarterly Journal of Economics, 84(3), 488–500. doi:10.2307/1879431
- Spence, M. (1973). “Job Market Signaling”. Quarterly Journal of Economics, 87(3), 355–374. doi:10.2307/1882010
- Rothschild, M.; Stiglitz, J. (1976). “Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information”. Quarterly Journal of Economics, 90(4), 629–649. doi:10.2307/1885326
- Holmström, B. (1979). “Moral Hazard and Observability”. Bell Journal of Economics, 10(1), 74–91. doi:10.2307/3003320
- The 2001 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (Akerlof, Spence and Stiglitz), for analyses of markets with asymmetric information: official summary.
Websites to explore
- Brazilian Access to Information Act (Law 12,527/2011): public transparency as a reduction of the asymmetry between state and citizen.
- Brazilian General Data Protection Law — LGPD (Law 13,709/2018): legal limits on the collection and use of personal information.
- Brazilian Open Data Portal: public datasets for analysis and system development.
- DataJud — National Judicial Database (CNJ): an example of an information system that changes management decisions in the courts.
