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This idea was originally studied in the context of looking for a job. An employer is interested in hiring a new employee who is "skilled in learning." Of course, all prospective employees will claim to be "skilled at learning", but only they know if they really are. This is an information asymmetry. Skill in learning is malleable, and depends upon many factors, including diet, exercise and money. Spence proposes, for example, that going to college can function as a credible signal of an ability to learn. Assuming that people who are skilled in learning can finish college more easily than people who are unskilled, then by finishing college the skilled people signal their skill to prospective employers. No matter how much or how little they may have learned in college, finishing functions as a signal of their capacity for learning. However, finishing college may merely function as a signal of their ability to pay for college, it may signal the willingness of individuals to adhere to orthodox views, or it may signal a willingness to comply with authority.

Signaling Michael Spence originally proposed the idea of signaling. He proposed that in a situation with information asymmetry, it is possible for people to signal their type, thus believably transferring information to the other party and resolving the asymmetry.

Screening Joseph E. Stiglitz pioneered the theory of screening. In this way the underinformed party can induce the other party to reveal their information. They can provide a menu of choices in such a way that the choice depends on the private information of the other party. Examples of situations where the seller usually has better information than the buyer are numerous but include used-car salespeople, mortgage brokers and loan originators, stockbrokers and real estate agents.

Examples of situations where the buyer usually has better information than the seller include estate sales as specified in a last will and testament, life insurance, or sales of old art pieces without prior professional assessment of their value.

Because of information asymmetry, unscrupulous sellers can "spoof" items (like replica goods such as watches) and defraud the buyer. As a result, many people not willing to risk getting ripped off will avoid certain types of purchases, or will not spend as much for a given item. It is even possible for the market to decay to the point of nonexistence.

Benjamin Franklin, Autobiography

Reading about free software specifically and free culture in general causes a dangerous uptick in my idealism index. Idealism in the sense of hoping and even believing that we can all get along. (Somehow. Someday.) That we can help each other. I think I had a healthy share of idealism growing up but gradually over the years I’ve addressed this vulnerability by developing an outer shell of jaded cynicism. It’s much more comforting to have no hope than to have hopes that can be crushed. However, there is a good chance with this strategy that your heart will shrink a couple of sizes.

But then I read essays by Richard Stallman, listen to speeches by Eben Moglen, and read and listen to many other hopeful voices, and I start to see something better. Like Fox Mulder, I want to believe. Which of course is dangerous. You leave yourself open to ridicule if you believe. You might be dismissed as being naive. To which of course we should say, “So what?” I want to believe that we can do better.

The great moral question of the twenty-first century is: If all knowledge, all culture, all art, all useful information, can be costlessly given to everyone at the same price that it is given to anyone — if everyone can have everything, everywhere, all the time, why is it ever moral to exclude anyone from anything? If you could make lamb chops in endless numbers by the mere pressing of a button, there would be no moral argument for hunger ever, anywhere. I see no system of moral philosophy generated by the economy of the past that could evolve a principle to explain the moral legitimacy of denial in the presence of infinite profusion.

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