Information asymmetry occurs when one party to a transaction possesses superior knowledge compared to their counterpart. This imbalance creates inefficiencies that can sometimes cause market failure in the worst case.
James A. Mirrlees and William Vickrey received the 1996 Nobel Memorial Prize in Economics for fundamental contributions to the economic theory of incentives under asymmetric information. Their recognition highlighted the importance of information problems in economics.
George Akerlof introduced a model where sellers know the exact quality of a car while buyers only know the probability of whether it is good or bad. This dynamic drives out cars with not-so-bad quality until the market fails purely due to information asymmetry.
The 2007 Nobel Memorial Prize went to Leonid Hurwicz, Eric Maskin, and Roger Myerson for laying foundations of mechanism design theory. This field deals with designing markets that encourage participants to honestly reveal their information.
Moral hazard occurs when the ignorant party lacks information about transaction performance or ability to retaliate for breaches after interaction begins. It differs from adverse selection at timing level because it affects parties after interaction rather than before.