Short answers, pulled from the story.
Information asymmetry is a situation where one party in a transaction has more or better information than the other. It creates an imbalance of power that can cause transactions to be inefficient and, in the worst case, lead to market failure. Examples include adverse selection, moral hazard, and monopolies of knowledge.
Three Nobel Prizes have been awarded for work on information asymmetry. In 1996, James Mirrlees and William Vickrey won for contributions to the economic theory of incentives under asymmetric information. In 2001, George Akerlof, Michael Spence, and Joseph Stiglitz won for their analyses of markets with asymmetric information. In 2007, Leonid Hurwicz, Eric Maskin, and Roger Myerson won for laying the foundations of mechanism design theory.
The Market for Lemons is a 1970 paper by George Akerlof that models how information asymmetry causes market failure. In a used car market where sellers know the quality of their cars but buyers do not, sellers of good cars receive prices based on average quality and exit the market, leaving a higher proportion of defective cars. Akerlof showed this cycle can continue until the market ceases to exist entirely.
Signaling, coined by Michael Spence, is when the better-informed party transmits information to reduce asymmetry, such as a job applicant finishing college to signal learning ability. Screening, pioneered by Joseph Stiglitz, is when the less-informed party designs a menu of choices so that each type of person self-selects into an option that reveals their private information. Spence introduced signaling shortly after Akerlof's 1970 paper, and Stiglitz built on both.
Moral hazard occurs when the ignorant party lacks information about whether the agreed transaction is being performed as intended. Being insured, for example, can reduce an individual's incentive to avoid risk because they know costs will be covered. Kenneth Arrow identified moral hazard in his 1963 study of medical care, work that Akerlof drew on directly.
Jackson and Morelli identified asymmetric information between national leaders as a cause of conflict, arising when leaders differ in what they know about each other's armaments, military quality, tactics, determination, or political climate. James Fearon found in a game-theoretic analysis that two countries fail to reach a non-violent settlement when both have incentives to misrepresent their military resources. A frequently cited observation holds that most of the great wars of the modern era resulted from leaders miscalculating their prospects for victory.