2. Value of information
• Information helps executives to create and select
the appropriate course of action.
• Information also helps to stimulate creativity,
monitor performance, determine environmental
trends, generate scenarios and control activities.
• Furthermore, information is the major source of
fuel in planning and strategizing.
• After all, executives simply cannot function
without information.
3. Information and transaction costs
• Although “information” is an important
subject in many disciplines, it does not give
rise to any economic interest by itself.
• In a world of positive transaction costs,
imperfect information exists, and information
has to be transmitted from one who knows it
well to a receiver.
4. Why does asymmetric information exist?
• Nevertheless, information sometimes backs
up by information holders who fail to transmit
it to individuals who wish to receive it.
• Therefore, it is suggested that asymmetric
information exists between sellers and
purchasers, i.e. market participants possess
unequal share of information.
5. Examples of asymmetric information
Business
activity
Asymmetric information example
Bank A borrower knows more than bankers about his or her chance of
default .
Firm
investment
Although some investors may have private information about a
firm’s fundamental value, conflicting interests of informed and
uninformed traders not only increase a firm’s value uncertainty but
also make investors take a conservative view on the firm’s future
value .
Higher
education
The department head knows less about a perspective teaching
staff’s ability and attitude than the professors themselves .
Agriculture The tenant who rents a piece of land knows the soil quality better
than the landlords do; he is in the best position to estimate the rent
that he should pay .
Stock The managerial staff in a company knows more information about
the company than other stockholders .
Housing Residential unit purchasers do not hold the same information as
builders do .
Further reading: Li, R Y M (2012) ‘Econometric modelling of risk adverse behaviours of entrepreneurs in the provision of house fittings in China’,
Australasian Journal of Construction Economics and Building, 12 (1) 72-82
6. Problem of asymmetric information?
• The associated unobserved variables under
asymmetric information may affect the cost
and benefit, e.g., investors can reap more
profit by acquiring rates of return information;
however, it may also cause home investors to
suffer losses.
10. Mao Pi Fang in China: where is the
bath tub? Water closet? Washing basin?
11. Firm size and asymmetric information
Li, R. Y. M. (2009c). The Myth of Fly-by-night Developers in Shanghai and Harbin.
Economic Affairs, 29, 66-71.
12.
13. Why do the shops look similar in shopping centers?
Source: Rita Yi Man Li (2014) Transaction Costs, Firms’ Growth and Oligopoly:
Case Studies in Hong Kong Real Estate Agencies’ Branch Locations, Asian Social
Science; Vol. 10, No. 6, 40-52
14. They are two different shopping centers!
See Rita Yi Man Li (2014) Transaction Costs, Firms’ Growth and Oligopoly: Case
Studies in Hong Kong Real Estate Agencies’ Branch Locations, Asian Social Science;
Vol. 10, No. 6, 40-52
15. Does it mean that asymmetric
information must be a threat to our
business World?
• Consider the following issues:
• Why estate agencies exist in our market?
• Why do we need middle man?
• If there is perfect information, will these
industries exist in our market?
