Economists have known for a while that if one party to a deal has inside information and the other does not, then markets may not work as well as we would hope.
Adverse selection: If some people know more than others about the quality of a product, then some high-quality products may not be traded at all, or not be traded very much.
When there is inside information, market doesn't work well because the buyers will not buy without proof and the sellers cannot offer the proof.
Insurance policy depends on mutual ignorance. An insurance company can only insure me against an event like a burglary, a fire, or a medical bill if neither of us has any idea whether it will happen. If we could predict the future, insurance would be meaningless.
One way to bridge the information gap in markets previously hindered by inside information is for trustworthy vendors to find ways to signal their reliability. The other way for insurance company is to reduce the premium（参加保险的入险费） and increase the deductible（免赔额，即投保人自行承担的费用）. They can also make customer have health examinations.
Moral hazard: If you compensate people when bad things happen to them, they may get careless. Paying people to be unemployed encourages unemployment. Yet if a government scrapped unemployment benefit, there would still be jobless people, and supporting the jobless is something that every civilized society should do.
To bridge the information gap, a real signal of quality should be one that sellers with bad quality good cannot make or cannot afford to make.
They can build impressive buildings, which represent the companies are stable and have promise.
Expensive advertisement, great sunk cost (like the magnificent buildings) are all signals of quality and stability.
Two consequences of imperfect information:
(1)Adverse selection
(2)Moral hazard
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