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Imperfect Information Definition

[Summary]The Economics of Seinfeld Concept: imperfect information Imperfect information is a situation in which the parties to a transaction have different information, as when the seller of a used car has more information about its quality than the buyer. Se

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The Economics of Seinfeld

Concept: imperfect information

Imperfect information is a situation in which the parties to a transaction have different information, as when the seller of a used car has more information about its quality than the buyer. Sellers often have better information about a good than buyers because they are more familiar with it. They know more about its quality, durability, and other features. Buyers, in contrast, have limited contact with the commodity and thus have less information. Another common example of asymmetric information occurs in the labor market. Workers are knowledgeable about their skills, industriousness, and productivity. Employers, in contrast, have limited information about the quality of prospective workers. Another good example is the insurance market. Insurers often have less information about the risks taken by their clients, and in fact, insurance may alter a person's behavior.

EconPort

An important element of a competitive market is perfect information. By perfect information we mean that anything that may impact a buyer or seller's decision making process is known and understood. For example, in a perfectly competitive market for health insurance, providers would have full information on their clients' health status and charge premiums directly in relation to the their expected costs. However, our real world transactions often involve incorrect/incomplete information; in reality, individuals know a lot more about their own health than do potential insurers. This missing/incorrect information may lead to market failure because the party with better information has a competitive advantage. To further our understanding, we take a look at the health care insurance market and the used car market for a couple of examples of market failure caused by imperfect information. We will also look at how society may deal with informational asymmetries, and an interesting case study published in a recent The Economist magazine article.

Perfect information

In economics, perfect information is a feature of perfect competition. With perfect information in a market, all consumers and producers are assumed to have perfect knowledge of price, utility, quality and production methods of products, when theorizing the systems of free markets, and effects of financial policies.

The Problem of Imperfect Information and Asymmetric Information ยท Economics

The Problem of Imperfect Information and Asymmetric Information

By the end of this section, you will be able to:

Analyze the impact of both imperfect information and asymmetric information

Evaluate the role of advertisements in creating imperfect information

Identify ways to reduce the risk of imperfect information

Open Yale Courses | Game Theory | Lecture 18

We consider games that have both simultaneous and sequential components, combining ideas from before and after the midterm. We represent what a player does not know within a game using an information set: a collection of nodes among which the player cannot distinguish. This lets us define games of imperfect information; and also lets us formally define subgames. We then extend our definition of a strategy to imperfect information games, and use this to construct the normal form (the payoff matrix) of such games. A key idea here is that it is information, not time per se, that matters. We show that not all Nash equilibria of such games are equally plausible: some are inconsistent with backward induction; some involve non-Nash behavior in some (unreached) subgames. To deal with this, we introduce a more refined equilibrium notion, called sub-game perfection.

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