Asymmetric information and/or imperfect information can cause two forms of market failure: 1) adverse selection and 2) moral hazard.Asymmetric information is where one party in the transaction has more information thanthe other party in the transaction.Imperfect information is a situation in which neither party has perfect information about the good/service being exchanged in a transaction.Such goods and services are sometime referred to as "experience goods."

In the late 1990s, car leasing was very popular in the United States. A customer would lease a car from the manufacturer for a set term, usually two years, and then have the option of keeping the car. If the customer decided to keep the car, the customer would pay a price to the manufacturer, the "residual value," computed as 60% of the new car price. The manufacturer would then sell the returned cars at auction. In 1999, the manufacturer lost an average of $480 on each returned car. (The auction price was, on average, $480 less than the residual value. Why was the manufacturer losing money on this program? Was this a problem of adverse selection or moral hazard?

• What should the manufacturer do to stop losing money?Will rational actors use rules of thumb?