[1] One application considers information embodied in certain types of commodities that are "expensive to produce but cheap to reproduce.
Once information is recorded "on paper, in a computer, or on a compact disc, it can be reproduced and used by a second person essentially for free.
In recent decades, there have been influential advances in the study of information asymmetries[4] and their implications for contract theory, including market failure as a possibility.
[8] Experimental and game-theory methods have been developed to model and test theories of information economics,[9] including potential public-policy applications such as mechanism design to elicit information-sharing and otherwise welfare-enhancing behavior.
[10] An example of game theory in practice would be if two potential employees are going for the same promotion at work and are conversing with their employer about the job.
If they talk about the promotion with each other in a process called colluding there may be the expectation that both will have equally informed knowledge about the job.
However the employee with more information may mis-inform the other one about the value of the job for the work that is involved and make the promotion appear less appealing and hence not worth it.
[13] Although Hayek's work was intended to discredit the effectiveness of central planning agencies over a free market system, his proposal that price mechanisms communicate information about scarcity of goods inspired Abba Lerner, Tjalling Koopmans, Leonid Hurwicz, George Stigler and others to further develop the field of information economics.
The information requirements of the transaction are the prime determinant for the actual (mix of) coordination mechanism(s) that we will observe.
[16] Moral hazard is present when there is a change in the agent's behaviour after taking out insurance cover to protect them.
The Global Financial Crisis of 2008 is another example, where Mortgage-backed securities were formed through the collation of subprime mortgages and sold to investors without disclosing the risk involved.
[21] For moral hazard, contracting between principal and agent may be describable as a second best solution where payoffs alone are observable with information asymmetry.
[22] Insurance covers will often include a waiting period clause to refrain agents from changing their attitude.
This works because the action they took (going to school) was easier for people who possessed the skill that they were trying to signal (a capacity for learning).
[25] Risk attitude directly influences the behaviour of economic agents during decision-making under uncertainty by altering the individuals' perception towards the valuation and reliability of information within the market.
[27] They are more likely to choose a decision with a guaranteed outcome that has minimal risk, even if that meant foregoing a payoff that is potentially higher.
Risk-neutral managers primarily focus on maximising the expected outcome irrespective of the level of risk.
While, risk-seeking managers have the tendency to prefer investments with the highest potential return, even if that decision meant undertaking a higher degree of risk.
[29] The indirect network effect occurs as a complementary goods benefit from the adoption of the initial product.
[33] To form a following, low initial prices need to be offered, along with widespread marketing to help create the snowball effect.
In 2001, the Nobel prize in economics was awarded to George Akerlof, Michael Spence, and Joseph E. Stiglitz "for their analyses of markets with asymmetric information".