A basic assumption of traditional economics is that "economic man" has complete information. In fact, people have long known that in real life, market players can't have complete market information. Information asymmetry will inevitably lead to the interests of information owners being damaged by the other party for their own greater interests, which is called moral hazard and adverse selection in theory. In order to reduce or avoid this behavior or reduce the cost of information search and improve the efficiency of social resource allocation, economists have put forward many theories and models. Based on the value of information, the three winners of the 200 1 Nobel Prize in Economics have applied the theory of information asymmetry to various fields, which has been verified by practice, thus revealing the core of the contemporary information economy.
First of all, Ackell Love started the application of information asymmetry in commodity market with its paper "Defect Market" published in Journal of Harvard University. Stiglitz analyzed the moral hazard in insurance market and credit market, and put forward how traders who lack information should get more information. Spencer, on the other hand, used his doctoral thesis "Signals of the Labor Market" to deeply explore the root causes of information asymmetry between employers and candidates in the talent market.
Ackell Love proposed to analyze the used car market in 1970. The (second-hand or second-hand) model created the theory of adverse selection: in the second-hand car market, only the seller knows the real quality of the car, and the buyer only knows the average quality of the car, so he is only willing to pay the price according to the average quality; At any price of used cars, the owners of the most defective cars are most eager to sell their cars; Buyers will gradually discover their defects when they buy these defective products home; After a period of time, the average price of used cars that sellers can accept will drop, and those owners with the lightest defects will think it is more cost-effective to keep their cars for their own use; This means that the average quality of those cars still on the market is further reduced. Therefore, with the decline of price, there is adverse selection effect: sellers with higher quality than average will quit the transaction, and only sellers with low quality will enter the market. When the model is extended to the whole commodity market, adverse selection shows the destructive effect of fake and shoddy goods on the market: they sell at low prices, which may squeeze good products out of the market, undermine consumers' trust in the market, lead to the shrinking of the market, and ultimately reduce the welfare level of the whole society. However, both manufacturers and consumers who produce high-quality products can find better ways to transmit and search information. First of all, manufacturers can provide warranty promises or advertise to convey the signal of quality products to consumers; Secondly, an independent quality supervision and certification institution can be established to help consumers identify inferior products; In addition, there are contract solutions (that is, the behavior of both parties to the transaction is constrained in the contract) and credit solutions (that is, allowing manufacturers who provide high-quality products to obtain excess profits-"credit rent"), thus forming an effective incentive mechanism. Once a manufacturer's reputation goes wrong, it will definitely lose its benefits. This makes reputation a real signal).
Similarly, in the insurance market, moral hazard comes from the insurance company's failure to observe the personal behavior of the insured: if the insurer fails to perform the contract according to the routine or is deliberately insured, it will often make the insurance company bear a higher proportion of compensation than the normal probability; At this time, adverse selection comes from the fact that the insurance company does not know the risk degree of the insured in advance, which makes the insurance level unable to reach the optimal level under the condition of information symmetry. When the premium is at a general level, the utility of low-risk consumers after insurance may be lower than that without insurance, so such consumers will withdraw from the insurance market, and only high-risk consumers will be willing to take insurance. When low-risk consumers quit, insurance companies will lose money if premiums and compensation remain unchanged. In order not to lose money, the insurance company will have to raise the premium. In this way, those customers who are unlikely to encounter accidents think that it is not cost-effective to pay this fee, so they will no longer take out insurance, and high-risk consumers will "expel" low-risk consumers from the insurance market. This is the problem of adverse selection in the insurance market. In order to solve this problem, insurance companies can distinguish the insured with different risks by providing different types of contracts, so that the insured can choose between two insurance methods: high self-odds plus low premium and low self-odds plus high premium to prevent the insured from cheating.
In the labor market, for employers, the education level of candidates plays a role in screening and indicating. A person with a college degree can provide a signal to the employer to prove his ability. It is with the signal of "diploma" that employers will choose employees according to the average decision and decide the remuneration they deserve. Therefore, people think that people may stay in school mainly not to gain more knowledge and production technology, but to convince potential employers that they can create higher production efficiency and deserve higher wages. It is precisely because of the information asymmetry between employers and employees in the labor market that it is required to rely on a market signal to help the party with missing information identify.