Information asymmetry can create challenges in financial markets from "summary" of The Economics of Money, Banking and Financial Markets, eBook, Global Edition by Frederic S. Mishkin
Information asymmetry refers to a situation in which one party in a transaction has more or better information than the other party. This can lead to challenges in financial markets because it creates opportunities for one party to take advantage of the other. For example, if a company has more information about its financial health than its investors, it may be able to sell shares at a higher price than they are actually worth. This can result in investors losing money and erode confidence in the financial markets. In financial markets, information is crucial for making informed decisions. When there is a lack of information or when one party has more information than the other, it can lead to misallocation of resources and inefficiencies in the market. For instance, if borrowers have more information about their creditworthiness than lenders, they may be able to secure loans at lower interest rates than they should be eligible for. This can result in lenders making losses ...
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