Question

How do conflicts of interest make the asymmetric information problem worse?

Short answer

This exacerbates the asymmetric information problem because conflicting incentives encourage individuals or institutions to withhold or misrepresent information.

Step-by-step solution

Step 1. Introduction

A conflict of interest occurs when a person's personal interests — such as family, friendships, finances, or social considerations – may impair his or her judgement, decisions, or actions at work.

Step 2. Explanation

Conflicts of interest arise when an individual or organization has various goals that are incompatible with one another. For instance, loan managers at a bank may offer loans to unqualified clients in order to earn higher commissions or meet a goal. The bank's goal is to provide as many loans as possible in order to raise interest rates on the loans they receive from borrowers.

Here, their personal interest in their financial gain is in conflict with interest of the bank.