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 informations mean when one party has got a better information than the other party and that can lead to imbalance of power between the two parties.

asymmetric information played a major role in subprime mortgage crisis because their buyers who were unaware of the actual prices of the real estate underlying asset and they were buying the derivatives at any cost and they were valuing their assets at any price so when the bubble burst they were the worst sufferer.

moral hazard is a situation that is arising out of asymmetric information and in which one party willingly gets himself exposed to the risk knowing that other party will bear the cost . that could be exampled with credit default swaps in which there were bad loans provided by various commercial banks.

Adverse selection problem is another problem arising out of asymmetric information in which of the parties have different information and one party try to gain at the cost of the other.

So asymmetric information plays an important role that there is an imbalance of information and imbalance of power between different persons in a market and hence it should be equated and difference in information must be minimised in order to have an efficient market.