|A condition in which two economic actors possess, or have access to, different quantities or types of knowledge essential to a transaction. This situation normally confers an advantage upon the agent having the higher level of information. For example, in the field of industrial relations an employer may gain leverage over workers when wages are being bargained if the former has more information concerning the firm\'s financial position (and, hence, greater knowledge of the maximum wage rate it is able to pay) than do the latter. The concept of information asymmetries has also found application in industrial organization theory where, for example, information asymmetries between two firms may encourage opportunistic behaviour by the firm with more information, thereby undermining the consensual foundations on which subsequent transactions might be based (George et al., 1992). Information asymmetries have also been used to understand the problems associated with the public regulation of privatized utilities (Campbell, 1996) and the origins of obstacles to collective action (Hardin, 1982).
Because information is especially important in supporting financial transactions, information asymmetries are especially significant in this sector of the economy. When a lender is considering whether or not to loan funds to a borrower (or, alternatively, when an investor is considering taking an equity position in a firm through private placement), the major challenge for the lender/investor is to distinguish good customers from bad ones. The ability to determine this depends on the availability of information concerning the borrower\'s financial health, past credit history, employment history, and personal traits that may influence credit worthiness. Leyshon et al. (1998) argue that while, previously, financial institutions sought to reduce this information asymmetry by collecting the requisite information through face-to-face interaction between bankers and customers (thereby privileging spatial proximity because of its ability to produce trust), more recently this process has become mediated by information and communication technologies that enable such information to be collected \'at-a-distance\'. (See also prisoner\'s dilemma; social capital.)Â (MSG)
References Campbell, H.E. 1996: The politics of requesting: strategic behavior and public utility regulation. Journal of Policy Analysis and Management 15: 395-423.Â George, K.D., Joll, C. and Lynk, E.L. 1992: Industrial organization: competition, growth and structural change, 4th edn. London: Routledge.Â Hardin, R. 1982: Collective action. Baltimore: Johns Hopkins University Press.Â Leyshon, A., Thrift, N.J. and Pratt, J. 1998: Reading financial services: texts, consumers, and financial literacy. Environment and Planning D: Society and Space 16: 29-56.