chapter  10
Role of Uncertainty and Information Asymmetry
Pages 18

I n the previous chapter, we focused on the relative efficiency of policy instru-ments under different economic conditions. In this chapter, we focus on policy design under uncertainty and asymmetric information. In everyday language, the problems of adverse selection and moral hazard are usually labeled “uncertainty.” However, in more technical parlance, it is customary to reserve the term uncertainty for stochasticity or randomness of the environment. It must be distinguished from a situation where one party has more or better information on some aspect of the economic relationship than the other. This is the case under asymmetric information, under which the information gap will be exploited if by doing so the better-informed party can achieve some advantage.