Information Asymmetry
A situation where one party in a transaction has more or better information than the other.
What is Information Asymmetry?
Information asymmetry describes a condition in markets or contracts where one party possesses more or better information than the other, creating an imbalance of power and knowledge that can lead to inefficient or unfair outcomes. Information asymmetry is pervasive in financial markets: corporate managers know more about their company's prospects than outside investors (giving rise to insider trading regulations); borrowers know more about their creditworthiness than lenders (driving credit scoring systems); and insurance buyers know more about their own risk than insurers. The resulting market failures — adverse selection, moral hazard, and principal-agent problems — were analyzed by economists George Akerlof, Michael Spence, and Joseph Stiglitz, who shared the 2001 Nobel Prize in Economics for this work.
Example
When a company's CEO knows that next quarter's earnings will far exceed consensus estimates but has not yet disclosed this, she possesses material nonpublic information — a form of information asymmetry relative to outside investors. SEC disclosure rules, earnings guidance policies, and Regulation FD are mechanisms designed to reduce this asymmetry and ensure all investors access material information simultaneously.
Source: SEC — Regulation FD