Asymmetric Information

Principal

a person for whom another person, called the agent, is performing some act

Agent

a person who is performing an act for another person, called the principal

Moral hazard

a problem of asymmetric information whereby the informed party takes advantage of their information after they enter a transaction by altering their behavior and taking on more risk

Adverse selection

a problem of asymmetric information whereby the informed party takes advantage of their information before they enter a transaction, so that the good or service is bought by only a certain group of people who offer the worst return for the company

Screening

an action taken by an ignorant party to induce an informed party to reveal information on their type by providing the informed party with a menu of choices

Signaling

an action taken by an informed party to reveal private information on their type to an ignorant party

Principal Agent Problem

the problem that exists when a principal wants an agent to act on her behalf, but the agent has a conflicting goal or preference

Behavioral economics

the subfield of economics that integrates the insights of psychology