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Difference between Asymmetric Information and Moral Hazard

AS, A Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

A short topic video on two aspects of information failures in markets

Asymmetric Information

Asymmetric information

Asymmetric information is when there is an imbalance in information between buyer and seller which can distort choices
  1. Landlords who know more about their properties than tenants
  2. Mortgages: A borrower knows more about their ability to repay a loan than the lender, insufficient checks might be made
  3. Car insurance companies cannot tell the risks associated with selling premiums to each single driver – they have to pool risks
  4. Some students have superior knowledge about how to get into the elite / best universities including which prior courses to take
  5. Doctors have superior knowledge about drugs and treatments 
  6. A used-car seller knows more about vehicle quality than a buyer
  7. Information advantages for high-frequency stock market traders

Moral Hazard

  • When the party with superior information alters his/her behaviour in such a way that benefits himself while imposing costs on those with inferior information
  • Moral hazard occurs when insured consumers are likely to take greater risks, knowing that a claim will be paid for by their cover
  • The consumer knows more about his/her intended actions than the producer (insurer)
Bail-outs of the banking system after the 2007 crash
Dentists and patients face the problem of moral hazard (because of supplier-induced demand)

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