A Study On The Relationship Between Information Asymmetry And Market Efficiency

After decades of continuous development and improvement, information economics has been expanded to many fields of study. Among these fields, the study of information asymmetric theory is said to be the center of the whole discipline. In1970, the American economist George Akerlof published a report entitled "defective market:quality uncertainty and the market mechanism", in which he pointed out that the asymmetry of information can lead to market failure, or even completely failure. This article is considered as a mark, which opened the study of asymmetric information area. And then Michael Spence and Joseph Stiglitz improved it with the theory of signaling and screening. For now, it has been become a common sense that information asymmetry will cause market failure. Although this view has been widely recognized by the academic community, but the voice of doubt is also never disappeared. Especially since the nineties of the last century, with the widely use in practice of asymmetric information theory, some exceptions that contrary to the traditional view are gradually been found. Many scholars have been trying to analyze these cases to illustrate this view, which is, under certain conditions, information asymmetry doesn’t cause market failure, even more, market failure could happen when information become symmetric. These cases have prompted scholars to constantly revise the existing traditional theory, and to explore new theoretical models, to meet the economic conditions and the needs of the changing realities. Some scholars try to explain these phenomena by loosening some of the traditional assumptions, or modifying the traditional theory model, or even build new model. The study of this paper is in this very area.This paper studies the relationship between information asymmetry and market efficiency, especially in the case of information asymmetry does not reduce the efficiency of the market. Three factors are focused here, the preference information or neutral information, trading advantage or disadvantage, and composite information. By study these three factors, we found that they all in certain extent are able to moderate, ease or even avoid the effect of adverse selection on market efficiency. Depending on the specific study, we draw the following main conclusions:First, only preference information can lead to adverse selection, and adverse selection is a necessary condition for the ultimate impact of market efficiency, on the contrary, neutral information does not affect the asymmetry of neutral market efficiency, since it doesn’t cause adverse selection. Second, in the non-equilibrium market conditions, information superiority caused by asymmetric information will also be affected by other factors that cause by non-equilibrium trading advantages and disadvantages, if one side of the transaction both have trading disadvantage and information superiority, then they may mutually offset the influence, thus easing, or even avoid an impact on market efficiency. Third, the commodity is always constituted by a variety of attributes, the corresponding information is also compounded by multiple information, thus under the conditions of composited information, the information asymmetry effect on market efficiency will be eased, the specific effect varies according to specific circumstances.In this study, the content is divided into the following sections:The first chapter is the introduction. This chapter will introduce the background of the study, and then lead to the problems that we want to solve, and then elaborate the purpose and significance, as well as the framework of this study, at last it points out the innovations of this study.The second chapter of the study is the literature review. In this chapter, we review the information economics, information asymmetry theory and its development context, and list the existing question to the information asymmetry traditional theory, which is, under certain conditions, information asymmetry doesn’t cause market failure, even more, market failure could happen when information become symmetric. In addition, depending on the theories involved in this study, this chapter also reviews the literature of the Second-Best theory, and Agent Based model approach.The following chapters, chapter3,4and5, are the main parts of the study, respectively discuss the three factors which can moderate the impact of information asymmetry on market efficiency, which are, the preference information or neutral information, trading advantage or disadvantage, and composite information.The sixth chapter is the ABM simulation test, designed and realized by NETLOGO, to test the propositions and conclusions that brought up in the earlier chapters. The seventh chapter is the conclusion chapter of the entire study. In this chapter, it summarizes several conclusions and the deficiencies of this study, as well as directions for future research.The main innovations of this study are as follows:First, according to the different effect on market efficiency, this study comes up with the idea of neutral information and preference information, and draws the conclusion that neutral information does not lead to adverse selection, thus does not affect the market efficiency. The method of information classification has been studied in the literature, but not combined with market efficiency. So this is one of innovations of this study.Second, this research compares and summarizes the effect of trading advantage and disadvantage with information asymmetry context by analyzing specific market cases. There are a few theory in the literature mentioned trading advantage and disadvantage, or similar idea. Some scholar introduced "pricing power" to indicate this kind of attribute in some specific market case, then classify market participants into two groups,"information holder" and "information demander". This kind of idea shows the direction to the trading advantage study in this paper. We hope that this idea can draw more attention from interested scholars.Third, either preference information or trading advantage is under single information assumption. However, in reality a product always has more than one attributes, and correspondingly, these attributes are described by more than one kind of information. These information composite together to indicate the entire product, and by considering these all, consumers make whether to purchase it and how much it values. So that is, composited information. In information asymmetry context and composited information assumption, we drew some interesting conclusions.Fourth, this research studies the smart taxi market build on location based service (LBS) as a case. Thanks to NETLOGO and ABM approach, we directly introduce location information as a dependent factor in our model, instead of transform it into other factor such as time, distance or cost. Because LBS is an emerging and promising market form, and it surely will become more attractive to scholars. But now the related study is very few, so our study is a contribution to this field. At last, ABM approach is employed to simulate and test the propositions and conclusions of this study. This approach combines game theory, comprehensive system, evolutionary computation, and Monte Carlo method, and shows its superiority in simulating tremendous, small, and independent individuals making decisions. It gives us great help on reappear complicated reality system and forecast macro-effect difference caused by small changes.Above innovations also contain the theoretical contributions of this study. In the past decades, plenty of cases that contrary to the information economics theories show themselves during the application of information economics into every fields of real economy life. Considering the importance of information asymmetric theory in information economics, every small progress in asymmetric theory may lead to new opportunity of evolution of the whole discipline.Except theoretical contributions, this study also has certain practical significance. First, it shows that industrial policies making should consider the type of information, that is, preference information or neutral information, because they have different effect on market efficiency when information asymmetry happens. In order to enhance the efficiency of market, blindly pursuit of information transparency may not be the best way to improve market efficiency. Second, in reality, non-equilibrium is normal status, and it shows that small factors can also make huge difference. So, take comprehensive factors and non-equilibrium market into account is a trend of this field. To do so, building pure mathematical model may not achieve this goal, but ABM simulation approach will contribute its effort. This not only provides a new perspective for policy makers to develop policies to address the problems, but also for evaluation of past policy provides a measure of the scale.