A situation where some participants in an economic transaction have access to more, or better, relevant information than other participants. For example, an insurance company may not know whether an individual driver is good or bad, but the individual knows how often they drive when tired or after drinking alcohol. In this case the driver possesses more information relevant for an insurance contract than the insurance company. The demonstration that a competitive equilibrium is Pareto efficient assumes symmetric information. Economic agents need not be fully informed, but they must be equally informed (or equally uninformed). For example, a competitive equilibrium is efficient when there is uncertainty about future asset returns provided no agent has superior information. Asymmetric information is a source of ‘market failure. Agents with superior information will attempt to gain advantage from this, and inefficiency will result. See also adverse selection.
|Reference: Oxford Press Dictonary of Economics, 5th edt.|