Information asymmetry can have a significant impact on purchasing behavior, particularly in the context of an auction. Moral hazard and adverse selection are types of information asymmetry that affect buyers’ decision-making and sellers’ disclosure policies (Adachi et al., 2023). In the case of eBay Motors, information asymmetry is present due to varying disclosure costs (Lewis, 2011). Dealers can use higher disclosure costs to ensure moral hazards, leading to a greater chance of a bid.
As De Meza et al. (2021) note, moral hazards occur before the agreement and lead buyers to take on riskier deals. As soon as the buyer makes a bid, the seller can use adverse selection to provide them with beneficial information that would increase the car’s cost (Powell & Goldman, 2021). Therefore, information asymmetry can impact both the demand and purchasing decisions of buyers. The higher disclosure cost tends to attract more potential customers due to moral hazard, while the presence of adverse selection may shape buyers’ opinions about the goods.
The lack of information in the case of eBay Motors cannot be corrected by signaling or screening due to the varying costs of disclosures. Signaling occurs when one party provides another with credible information, which can be considered insider (Susan & Natu, 2022). In this situation, the strategy can help mitigate information asymmetry, as buyers will receive more detailed and accurate information about the product. However, the problem is that the buyer has a low chance of receiving insider information from the seller.
Screening is a process of filtering the information and evaluating it as true or false (Avinadav & Shamir, 2021). Screening in this situation can be ineffective because the buyer does not know the criteria for assessing the information and cannot possibly distinguish between true and false information provided by the seller. Therefore, due to the disclosure model of the web platform, signaling and screening would be inefficient in eliminating information asymmetry.
References
Adachi, D., Nakata, H., Sawada, Y., & Sekiguchi, K. (2023). Adverse selection and moral hazard in corporate insurance markets: Evidence from the 2011 Thailand floods. Journal of Economic Behavior & Organization, 205, 376-387.
Avinadav, T., & Shamir, N. (2021). The effect of information asymmetry on ordering and capacity decisions in supply chains. European Journal of Operational Research, 29(2), 562-578.
De Meza, D., Reito, F., & Reyniers, D. (2021). Too much trade: The hidden problem of adverse selection. Journal of Public Economics, 204.
Lewis, G. (2011). Asymmetric information, adverse selection, and online disclosure: The case of eBay Motors. American Economic Review, 101(4), 1535-1546.
Powell, D., & Goldman, D. (2021). Disentangling moral hazard and adverse selection in private health insurance. Journal of Econometrics, 222(1), 141-160.
Susan, E. B., & Natu, M. M. (2022). A critical review of information asymmetry in the business cycle: How digital ledger technology can transform and sustain the business cycle. PLoS Sustainability and Transformation 1(7).