ABSTRACT
Chapter 11 considers how to manage asymmetric information about some characteristic of one party. If information is asymmetric, the less informed party also faces uncertainty and bears risk. Asymmetric information results in adverse selection and distorts the allocation of resources. Resolving the asymmetry can add value and profit. The asymmetry can be resolved by: (i) Appraisal if the characteristic about which information is asymmetric is objectively verifiable; (ii) Screening to indirectly elicit the characteristics of the better-informed party; and (iii) Signaling by the better-informed party to indirectly communicate its characteristics. Screening and signaling work only if they induce self-selection among the better-informed party with different characteristics. Contingent contracts can be used to screen and signal.
