Economists’ often assume that decisions made by various agents in their models are perfectly ‘rational’. A fundamental assumption underlying this ‘rationality’ – is free and equal access of information.
Unfortunately, in the real world information is rarely free -but more importantly rarely is it equally accessible. Information is often unevenly divided – with a group of people knowing more than another, leading to the problem of “Information Asymmetry”. Often, this leads to a complete breakdown in an economic model.
Information Asymmetry has applications everywhere, most prominently in the insurance industry. Here is a quick primer, explaining Information Asymmetry using an intuitive example.