What is meant by information asymmetry?

Information asymmetry refers to a scenario where there is an imbalance in the knowledge held by different parties involved in a transaction or decision-making process. In this context, it specifically highlights that one party possesses more or better information compared to the other, which can lead to advantages or disadvantages in negotiations and decision outcomes.

This concept is often discussed in economic and business settings, particularly in situations such as buyer-seller interactions where the seller may have more information about a product's quality than the buyer. This imbalance can lead to market inefficiencies, such as adverse selection or moral hazard. Understanding information asymmetry is crucial for developing fair practices and policies that bridge the information gap between parties.