Information asymmetry

Abstract

Often when human beings interact to make decisions, one human agent has more information than the other and this phenomenon is called information asymmetry. The fact that information asymmetry distorts the markets won Akerlof, Stiglitz and Spence a Nobel Prize. Generally, when one human agent is set to manipulate a decision to its advantage, the human agent can signal misleading information. On the other hand, one human agent can screen for information to diminish the influence of asymmetric information on decisions. With the dawn of artificial intelligence (AI), signaling and screening are easier to achieve. This chapter investigates the impact of AI on the theory of asymmetric information. The simulated results demonstrate that AI agents reduce the degree of information asymmetry and, therefore, the market where these agents are used become more efficient. It is also observed that the more AI agents that are deployed in the market, the less is the volume of trades in the market. This is because of the fact that for trades to occur, asymmetry of information should exist, thereby, creating a sense of arbitrage.