In economics, what term describes a situation where one party in a transaction has more information than the other?

Information asymmetry describes a situation in which one party in a transaction has more relevant information than the other.

The concept became especially influential through work by George Akerlof, Michael Spence, and Joseph Stiglitz, who shared the 2001 Nobel Prize in Economic Sciences for analyses of markets with asymmetric information. A classic example is a used-car seller who knows more about a vehicle’s defects than a potential buyer.

Unequal information can cause adverse selection before a contract and moral hazard after a contract. Adverse selection occurs when hidden characteristics affect who enters a market; moral hazard occurs when hidden actions change behavior after an agreement. These are related but not identical problems.

Markets respond through warranties, certifications, inspections, disclosure rules, reputation systems, and signaling. Education credentials can act as signals of worker ability, while an insurance deductible can reduce risky behavior. Information asymmetry does not mean one side knows everything; it means the distribution of useful knowledge is uneven.