Question

What’s asymmetric information? What is signaling theory? Use real-world examples to explain these theories.

Answer 1

Asymmetric information is known as a discrepancy of information between two parties when there is a information failures existing when one party will be having an economic transaction possessing greater material knowledge than the other party so there will be a presence of imperfect knowledge and it will provide a chance for exploitation of the interest of the other party.

Real-world example is, if I am selling a car then I will be likely to have full information about the service history and likelihood to breakdown and I will be trying to take advantage of this from other party by charging him higher money.

2. signalling theory is a theory in economics when two parties whether individuals or organisations have access to different information and one party must choose how to communicate that information to the other party and the other party must choose how to interpret the signal so it will be helpful in order to eliminate the price discrepancy to certain level.

for example the education degrees will be helpful in indicating more competence and it is providing as a signal to the hiring manager that you are more valuable and it will also mean that hiring the applicant will be making them look good.