My trip to an Auto Repair Shop and Experience with Asymmetric Information

Originally published on December 29, 2017 on The Irrational Observer.

This post focuses on the idea of Asymmetric Information. A concept that we all experience in our day to day exchanges of goods and services. Asymmetric means anything that is unequal on both sides, and information as we all know, is facts about someone or something. However, in economics, asymmetric information is present when a party in an economic transaction possesses greater knowledge than the other party. Additionally, these transactions are not necessarily for physical goods only, it applies to services as well.



Asymmetric information creates two types of problems, adverse selection and moral hazard. The former occurs before a transaction and the latter occurs after a transaction. Adverse selection refers to situations where sellers have more information about the quality of a product, or service where a buyer knows little or nothing. Moral hazard refers to the lack of incentive in guarding against risks where one is protected from its consequences. The existence of these problems creates an issue in the functionality of markets. Meaning prices and quantities do not reach a socially optimal point and self-interests lead to inefficient results. As the graph above illustrates, sellers that have more information about a product or service can use that information to charge a higher price.

Below are scenarios of asymmetric information in different markets:

1. You apply for a job and fail to reveal that you are unqualified for a job.


2. A real estate agent abuses the fact that you might not have full knowledge about any problems with the property.


3. Someone selling a used car does not reveal to you the issues associated with the car.

My personal experience with asymmetric information begins with a trip to an auto repair shop. I was planning a road trip for the new years and usually, if a trip is greater than 4 hours I would normally get the car checked for any issues. As I pulled up in the express lane, a mechanic appeared and asked me what it was that I needed. I told him that I am going to be on a car trip and want to check the fluids and oil of my car. I don’t know about any of your trips to your mechanics, but I get all nervous when I speak to a mechanic. The reason lays in asymmetric information. This mechanic possesses far more information about the true state of my car and has no incentive to reveal any truth or suggest a cost-effective fix.

Back to my story, I exit my car and had just picked up the latest Economist holiday double edition for a light read in the waiting room while they check on my car. Time passes and the mechanic hands me a piece of paper saying that the fluids are all good and I needed an oil change. I immediately inform him to change the oil, so we can be done. A few minutes pass then I was called out to pay for the service and the product. I get into my car and it does not work!  The technicians immediately began denying any accountability and placed the blame on my car saying it was originally faulty. The amount of unfamiliar jargon I faced was frustrating. All I knew was that my knowledge of the car was far less than theirs, and I did not have enough information to be able to determine if the fault was the car or the technician/s. As a result,  I was not able to dispute the bill I was charged, because I knew nothing.

Asymmetric information is something many of us deal with every day, and governments usually intervene to correct for these market failures. This is seen in medicine, insurance, law, and other fields. Yet in some industries like auto repair services, exploitation are still present.