The core of economies with asymmetric information

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Information economics encompasses a broad spectrum, from search theory to industrial economics, including oligopoly theory and innovation. A key focus is on optimal contracts, primarily analyzed through principal-agent models. Contract theory addresses how to structure optimal arrangements for the exchange of goods and services among agents. These models often assume asymmetric information, where parties have different knowledge about relevant variables, such as an individual's health in insurance contracts or effort levels in employment contracts. This asymmetry can lead to issues like moral hazard, adverse selection, signaling, and screening. Insights from contract theory are frequently referenced to discuss the impact of asymmetric information on the economy, helping to explain phenomena such as fixed wages and unemployment. However, caution is warranted when interpreting these conclusions, as the contracts in these models are determined by solving an optimization problem. This complexity underscores the importance of understanding the nuances of information economics and its implications for economic theory and practice.