Question

What is the problem of asymmetrie information? And how it links to the regulation of the Financial System?

Answer 1

Asymmetrie Information: Asymmetrie information deals with the study of decisions in transactions where one party has more or better information than the other. This asymmetrie creates an imbalance of power in transactions, which can sometimes cause the transactions to go awry, a kind of market failure in the worst case.

​​Problem of asymmetrie nformation

a. Adverse selection: Adverse selection is a market situation where buyers and sellers have different information, so that a participant might participate selectively in trades which benefit them the most, at the expense of the other trader. A standard example is the market for used cars with hidden flaws. Used cars owners have more information than they disclose while selling their cars. The people seeking insurance, which means that the decision-maker usually has a poor selection.

b. Moral hazard: Moral hazard can occur under a type of information asymmetrie where the risk-taking party to a transaction knows more about its intentions than the party paying the consequences of the risk and has a tendency or incentive to take on too much risk from the perspective of the party with less information. For example, a person with insurance against automobile theft may be less cautious about locking their car because the negative consequences of vehicle theft are now ( partially) the responsibility of the insurance company.

Regulation of the Financial System

Markets are becoming more volatile, which creates conditions for manipulating prices on individual financial instruments. The institutional regulation does not solve these problems and, ultimately, is limited to an ineffective control over the markets by regulators and the search for new options for economic agents. The emergence of dominant economic agents is viewed through the instability of the global financial system, through the access of this category of market participants to unique information technologies, when the opportunities to take advantage of information asymmetrie give even greater volatility(variability), primarily, to the financial market and its instruments. Increased volatility attracts new economic agents to the financial market. Economist say that asymmetrie Information leads to market failure. That is, the law of demand and supply that regulates the pricing of goods and services is skewed. The correct price cannot be set according to the law of demand and supply.