Question

What is ASYMMETRIC INFORMATION? Describe what it had to do with the Subprime Mortgage Crisis leading to the Great Recession. Make sure you elaborate on Adverse Selection and Moral Hazard. Use your own words.

Answer 1

Asymmetric information means when one party has better information than the other party and that lead to advantage of part of one-party and disadvantage on part of other party. So it causes an imbalance of power. It lead to a major cause for the subprime mortgage crisis because people were not aware of the real prices of the real estates they were buying anything at any prices believing that that was fairly priced so that was problem associated with the asymmetric information.

Moral hazard means hazards which happens when unnecessary risk are taken by parties who do not actually bear the risk so these investment banks and insurance companies were getting involved into a lot of transaction which where not directly exposed in them but they were indirectly exposed to real estate failure.

Adverse selection is another problem which happens when buyers and sellers have imperfect and different informations, undesired results occurs.

so it can be said that asymmetric information caused lot of problem which lead to the prime mortgage crisis because there was a lack of information equilibrium between buyers and sellers that lead to a lot of moral hazard and adverse selection problem.