Asymmetric information: introduction and difficulties The term asymmetric information derives from a situation in which one of the parties involved in a transaction knows more information than the other. In an economic relationship, information is not distributed equally between the parties, for example a material fact is known. It is generally the seller who has this additional information, however it is not uncommon for it to be vice versa. Of course this can have its drawbacks because one party now has the ability to take advantage of the other. There tend to be many problems related to asymmetric information, however the main 2 are: Adverse selection, this is where we see the use of asymmetric information and unethical behavior before a transaction is completed (ex ante information problem) – hidden information . For example, a person who has not enjoyed optimal health may feel the need to take out a life insurance policy more than a perfectly healthy person. The second of the main problems is Moral Hazard, here asymmetric information is again used immorally, but this time it happens after the transaction has been completed (ex post information problem) - hidden action. An example of this is that someone who has taken out fire insurance may be at greater risk of fire or committing arson resulting in payment by the insurance company. Game theory is an approach that takes into account the interdependence of agents' decisions and can be prominent in asymmetric information. It is a method for analyzing situations in which the results of your choices depend on the choices of others: there is mutual interdependence. When an insurance company decides to reduce or increase prices, it is not sure how its customers/rivals will react. This leads them to make big decisions… middle of paper… actions may be designed to limit payments or limit covered services, for example up to 3 days of hospitalization. The RAND Health Insurance experiment randomized families to insurance plans ranging from none (free care) to 95% deductible coinsurance with a deductible applied. Participants on the latter used 25 to 30 percent fewer services than those on the free plan and were 23 percent less likely to be hospitalized. This reduced use of services was however found to be harmful to those who were poor and ill, for example hypertension was less controlled. Insurance companies may also contract with specific providers, and the insured pays extra to use non-preferred providers. Efficient contracts guarantee P & Profit maximization and risk sharing is optimized. Profit is necessary for A to be willing to participate and must include an incentive for A to perform the required tasks and not opportunistic behavior.