Exploiting informational asymmetries is common from "summary" of The Economic Naturalist by Robert H. Frank
When one party in an economic transaction possesses more information than the other, a situation known as informational asymmetry arises. In such cases, the better-informed party can exploit their knowledge to gain an advantage over the less-informed party. This phenomenon is not uncommon in the real world and can be observed in various settings, such as markets, negotiations, and contracts. For example, consider the market for used cars. A seller who knows that the car being sold has underlying mechanical issues may choose not to disclose this information to the buyer, thereby taking advantage of the buyer's lack of knowledge. By withholding crucial information, the seller can sell the car at a higher price than it would fetch if its true condition were known. In this way, the seller is able to exploit the informational asymmetry to their benefit. Similarly, in negotiations between employers and employees, one party may possess more information about the true value of the employee's services than the other. If the employer is aware that the employee's skills are in high demand and therefore worth more than the current salary, they may choose not to disclose this information to the employee. As a result, the employer can keep the employee's wages low relative to their true market value, thereby exploiting the informational asymmetry in the negotiation process. In the realm of contracts, informational asymmetries can also play a significant role. For instance, when purchasing insurance, the insurance company may have more information about the likelihood of certain events occurring than the policyholder. The insurance company can use this information to set premiums that are higher than the expected value of the coverage, thereby profiting from the policyholder's lack of information about the true risks involved.- The concept of exploiting informational asymmetries is a common phenomenon in economics and can have significant implications for market outcomes and individual decision-making. By understanding how such asymmetries can be used to gain advantages, individuals and firms can better navigate economic transactions and protect themselves from potential exploitation.
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