Asymmetrical information

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Asymmetric information ( English asymmetric information ) is an economic term and describes the state in which two contracting parties do not have the same information when entering into and / or performing a contract or market participants . Dealing with problems that result from asymmetrical information is the subject of information economics and the economic analysis of (private) law.

Neoclassical

A central assumption of neoclassical economic models is complete information , which means that the actors know all environmental conditions and can observe the actions of their contracting parties. Information is available free of charge, contracts are complete, their fulfillment can be monitored and fully enforced for free.

Despite this assumption, which is not given in reality, neoclassical models can be used with good results in certain areas, namely when a partial market comes close to the model of the perfect market , for example in securities trading.

New Institutional Economics

In the New Institutional Economics , however, the assumption of limited rationality was explicitly introduced. Obtaining information is no longer free, but causes transaction costs.

Depending on the purpose of the explanation, a distinction is made between three different approaches within the new institutional economics:

The problem of asymmetric information

All neo-institutionalist approaches are based on limited rationality , but the problem of asymmetrical information is mainly addressed in the principal-agent theory . A relationship between a client (principal) and a contractor (agent) is considered, which is characterized, among other things, by the fact that the principal has less information than the agent.

There are three basic types of asymmetrical information:

Concealed properties

In type hidden features or hidden features ( English hidden characteristics ) knows the principal specific, immutable (or no longer free variable) Properties of the agent (or he offers goods and services ) before the contract is not, so it can improve the quality of the service offered do not judge before the contract ( ex ante ). There is therefore a risk of adverse selection (disadvantageous selection), that is, undesirable contractual partners are systematically selected. The Lemons problem described by George A. Akerlof is an example of this ; Another example is the insurance market, when insurers cannot assess what risk the insured pose individually.

Covert Actions and Covert Information

In type Covert actions and concealed information ( English hidden action and hidden information ) enter the information asymmetries only ex post on, so after signing the contract and during the contract. Covert actions mean that the agent has discretionary leeway, as the principal cannot (fully) observe his actions. Hidden information exists when the principal can observe the actions, but cannot assess their quality (e.g. due to a lack of specialist knowledge).

Examples of covert actions :

Examples of hidden information :

In both cases, the problem is that even after the contract has been fulfilled ( ex post ) the principal can not judge whether the result was achieved through qualified efforts by the agent or whether (or how much) the environmental conditions influenced the result. For example, if you go to the doctor with a cold and are prescribed medication, it is seldom clear whether the improvement would not have occurred without medical support ("A cold lasts a week, you go to the doctor only seven days.") This ignorance The agent can take advantage of it opportunistically without being exposed afterwards, which is known as moral hazard .

Typical examples are credit institutes and insurers , because both are not or not fully informed about the credit risk or the insured risk ( probability of the borrower's insolvency or the insurance damage to the policyholder ). When applying for a loan, credit institutions try to reduce asymmetrical information by performing a credit check ( Section 18 KWG ), loan collateral , the borrower's own financing contribution and the lending rates . Pursuant to Section 19 (1) VVG, insurers require an obligation to notify the policyholder of the risk circumstances known to the policyholder until the insurance contract is concluded; After conclusion of the insurance contract, the risk of asymmetry can be reduced by means of a deductible and insurance premiums or, in the case of life or health insurance, by means of a medical certificate / health certificate and insurance premiums. In the case of major risks, individual provisions of the VVG may be mandatory in accordance with Section 65 VVG and Section 210 VVG. Both must distinguish between pre-contractual and post-contractual asymmetry. Both objective aspects of the credit and insurance contract ( English hidden characteristics ) and the subjective behavior of the borrower and policyholder that is decisive for the execution of the contract ( English hidden action ) play a role . In the specialist literature , the first case is usually treated via adverse selection , the latter as moral hazard .

Covert intentions

The last type is the hidden intentions or hidden agenda ( English hidden intention ). Even if the principal has opportunities to observe the agent's actions, i.e. if there are no covert actions - or covert information problems, then in certain cases problems can still arise because the principal does not ex ante the intentions of the agent knows. If the principal makes investments that he cannot reverse (irreversible specific investments or sunk costs ), he becomes dependent on the agent. After the conclusion of the contract, he no longer has the opportunity to persuade the agent to behave in a desirable manner (no credible potential threat). In this context, one speaks of the hold-up risk when the agent can take advantage of this to gain an advantage at the expense of the principal. An example of this is the classic kidnapping / blackmail case. By handing over the ransom, the principal has made an irreversible investment and is dependent on the goodwill of the agent to ensure that the agreed part (for example, the release of hostages) is fulfilled.

The hold-up risk is therefore not a problem of asymmetrical information distribution, but rather a problem of incompletely negotiated contracts .

Problems and possible solutions

Asymmetrical information distribution in cooperation can have an impact both before and after the conclusion of a cooperation agreement. The problem of choosing the right partner arises ex ante . The asymmetrical information prevents advantageous contractual relationships. A bad contract or even no contract at all comes about. Ex post, i.e. in a cooperation itself, asymmetrical information distribution can have a negative effect on the stability of the cooperation. Therefore one has to try to get the problem of asymmetrical information under control. There are different mechanisms for reducing asymmetrical information or for avoiding the resulting consequences. The costs (in the broadest sense) that arise compared to the ideal solution are referred to as agency costs.

Problems using the example of a joint venture

Using a joint venture as a special form of cooperation, asymmetrical information distribution between the cooperation partners as principals and the cooperation managers sent to the joint venture as agents can be illustrated. The selected cooperation managers can consciously hide certain characteristics in advance, for example by signaling greater readiness for action or by pretending to have better language skills (hidden characteristics). In addition, after being posted, the principals cannot adequately assess the agent's behavior due to their ignorance of cultural differences, or they cannot observe the agent's behavior due to geographical distance. This creates room for maneuver for the agent to exercise restraint (hidden information). The specific investments of the principals in the joint venture can be exploited through the non-conforming behavior of the agent, for example as a result of the threat of emigration or negligent business activity (covert intentions).

Concealed properties

The elimination of the information asymmetry or the alignment of interests are possible solutions.

Elimination of information asymmetry

The principal-agent theory offers possible solutions :

The agent can signal its properties through signaling (signaling, signaling). The agent incurs costs to produce a certain signal. The benefits of signal production (advantages minus costs) must be positive for desired agents, but negative for undesired agents. Examples of signaling are university diplomas, Dekra used vehicle seals and the like.

If, on the other hand, the principal incurs costs to learn more about the agents' relevant characteristics, this is known as screening . Examples of this are assessment centers , test drives and the like.

Self-selection can be achieved through a suitable contract menu . Here the principal offers different contracts, so that only one contract is optimal for the different types of agents. Examples are insurance contracts with different levels of deductibles. Bad risks choose the usually much more expensive tariff with no excess, while good risks accept a higher excess with lower contributions.

Alignment of interests

Another possibility is to construct contracts in such a way that only desired agents would sign them. Only they have a self-interest in offering the service under these conditions. Examples are guarantees, reputations, etc.

Covert Actions and Covert Information

The main means of reducing the risks is to align interests, for example through the agent's profit sharing (incentive-compatible contract). The agents will perform the service desired by the principal out of self-interest. Examples are stock option plans for managers as well as product liability laws, reputation, and the like. The problem here is that the principal-agent theory assumes a risk-neutral principal, but a risk-averse agent, so that if the agent participates in the result, he has to bear an increased risk, which is associated with costs.

Through monitoring , the principal can try to make the agent's actions observable and subject to sanctions. However, this causes monitoring costs; Corporate governance activities are an example .

Costly state verification

Solution by means of incentive contracts, which specify payment modalities and a control mechanism.

Covert intentions

The risk of hold-up can only be countered by aligning interests. Examples are collateral, longer-term contracts and counter-deals (mutual hold-up situation). Hold-up means that one contractual partner uses a leeway in his favor, but the other can observe this behavior. Examples: fraud , loopholes , unfavorable contract design.

It is important to emphasize that the hold-up risk is not a problem of asymmetrical information.

Solution approaches:

  • Replace cooperation with hierarchy
  • Pledge or collateral

State solutions and market solutions

Regardless of whether the state offers solutions (state certifications, state qualifications as signaling , product liability law, warranty law, minimum standards), or whether the contracting parties want to solve the problems resulting from the information asymmetry through their bilateral agreement, there are always agency costs. The ideal solution, which would be achievable with complete rationality and complete contracts in the neoclassical, does not materialize.

However, since the state provides standardized institutions, the New Institutional Economics assumes that these state institutions make it easier for the contracting parties to conclude a contract, as they can refer to these institutions. Example: When a customer goes to a department store, he does not have to read through the general terms and conditions (GTC) posted somewhere, as these must not disadvantage him inappropriately. The department store, in turn, does not have to spend much money to promise it a two-year warranty, as this is already required by law.

However, since private signals are still being sent - despite state-standardized institutions (for example, some car manufacturers give a three-year guarantee), state regulation does not rule out a market solution. In some areas it only sets certain minimum standards, for example in consumer protection, since the state assumes that there will be no acceptable market solution.

The use of inside information through insider trading is also prevented by the state through sanctions.

literature

Books

  • Holger Fleischer: Information asymmetry in contract law. Beck, Munich 2000. ISBN 3-406-46933-7 .
  • J.-J. Laffont & David Martimort: The Theory of Incentives. The principal-agent model. Princeton University Press, Princeton / Oxford 2002, ISBN 0-691-09184-6 .
  • I. Macho-Stadler & J. David Perez-Castrillo: An Introduction to the Economics of Information. Incentives and Contract. 2nd Edition. Oxford University Press, Oxford / New York 2001, ISBN 0-19-924325-5 .
  • Arnold Picot, Helmut Dietl & Egon Franck: Organization. 4th edition. Schäffer-Poeschel, Stuttgart 2005, ISBN 3-7910-2371-3 .
  • Bernd Slaghuis: Contract management for investment projects, quantitative project planning to support contract management, taking into account information asymmetry. 2005, ISBN 3-631-54210-0 .

Essays

  • GA Akerlof: The Market for "Lemons": Quality Uncertainty and the Market Mechanisms. In: Quarterly Journal of Economics . Vol. 84 (3), 1970, pp. 488-500 ( PDF; 557 kB ).
  • Michael Jensen & William Meckling: Theory of the firm: Managerial behavior, agency costs, and ownership structure. In: Journal of Financial Economics . Vol. 3 (4), 1976, pp. 305-360 ( abstract ).
  • Joseph Stiglitz: The Contributions of the Economics of Information to Twentieth Century Economics. In: Quarterly Journal of Economics. Vol. 115 (4), 2000, pp. 1441-1478 ( PDF; 2.3 MB ).
  • Markus Spiwoks, Kilian Bizer & Oliver Hein: Informational Cascades: Explanation for rational herd behavior or just a Fata Morgana? In: Sofia discussion contributions on institutional analysis. No. 06-3, ( PDF; 454 kB ).
  • Michael Spence: Signaling, Screening, and Information. In: Studies in Labor Markets. 1981, pp. 319-358, ( PDF ).

Individual evidence

  1. ^ Herbert A. Simon : Theories of decision making in economics and behavioral science. In: American Economic Review . Vol. 49, no. 3, 1959, pp. 253-283.
  2. ↑ Oliver E. Williamson: Markets and Hierarchies: Analysis and Antitrust Implications. Free Press, 1983, ISBN 0-02-934780-7 .
  3. ↑ See for example Arnold Picot, Helmut Dietl & Egon Franck: Organization. 4th edition. Schäffer-Poeschel, Stuttgart 2005, ISBN 3-7910-2371-3 , p. 88 ff.
  4. ↑ Dirk Lippold: Theoretical approaches of personnel management: an overview. P. 5.
  5. ↑ Dirk Lippold: Theoretical approaches of personnel management: an overview. P. 5.
  6. ↑ Sven Marlow / Udo Spuhl, Das neue VVG compact , 2010, p. 621
  7. ↑ Martin Hellwig, insurance markets with incomplete information , in: Dieter Farny et al. (Ed.), Handwortbuch der Versicherung HdV, 1988, p. 1065
  8. ↑ Dirk Lippold: Theoretical approaches of personnel management: an overview. P. 5.