It causes sellers to avoid putting good used cars on the market, resulting in a market dominated by clunkers, according to George Akerlof's paper "The Market for Lemons.
According to the Myerson-Satterthwaite theorem, this situation makes it impossible for trade mechanisms to maximize total value. James Mirrlees devised a model to determine the optimum income tax level under this situation. A paper co-authored by Michael Rothschild demonstrated that this situation prevents equilibrium in the insurance market. This situation gives rise to the principal-agent problem, and according to Michael Spence, it can be ameliorated by signaling and screening. Special cases of this situation include adverse selection and moral hazard. It causes sellers to avoid putting good used cars on the market, resulting in a market dominated by clunkers, according to George Akerlof's paper "The Market for Lemons." For 10 points, name this situation in which one party in a transaction knows more than the other.
According to the Myerson-Satterthwaite theorem, this situation makes it impossible for trade mechanisms to maximize total value.
information asymmetry [or assymetric information; prompt on imperfect information; prompt on adverse selection or moral hazard before mentioned]