May 27, 2012

Asymmetric Information in Organisations

Globalisation has changed the way we live and interact, and more people being able to easily access all types of information. To this end, information technology has increased the amount of information to organisations compared to others, and therefore one of these organisations can take advantage of the other organisation’s lack of knowledge in any contractual relationship, this is referred to as “asymmetric information”. This area is considered as a branch of economic theory or contract theory. This situation occurs where there is imperfect knowledge, or in other words where there is an inequality of information between two different parties in a contract or business arrangement.

For an instance, in an employment contract as an applicant and a company, at the start of the employment contract, the two different parties have less information about each other. The employee or new comer knows more about his/her abilities and his/her commitment to stay in the company than the company knows. On the other side of the coin, the employee has some perceptions about his/her organisation which might be partly true or partly false as contrary to the employer. Or in organisational decision making where organisations need as much information and knowledge to make a robust decision making in different organsitational aspects.

These examples give a clear understanding of how asymmetric information is important to be understood by organisations. Applying this area of contract theory to different aspects of organisational operations and functions such as employment, procurement and logistics, training and development, etc. are crucial for the organisational success, and thriving in this tough competitive world of business today.

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