Double asymmetry of information in a waste treatment contract

It is well known that asymmetric information seriously distorts resource allocation in various economic markets, such as the used car market, insurance market, and so on. The waste market is no exception: Resource allocation in the contract of industrial waste treatment is also tremendously distorted by asymmetric information. There is, however, a specific feature to the asymmetric information in this contract, which cannot be seen in other contracts: double asymmetry of information. It can be categorized into two types of asymmetric information, namely types I and II asymmetric information. For convenience of explanation, let us take up type II asymmetric information first. Type II asymmetric information stems from the fact that information on the waste disposal process is owned only by waste disposers and cannot be observed by other actors. Type II asymmetric information makes it easier for waste disposers to dispose of waste improperly, presumably for the purpose of cost saving. On the other hand, type I asymmetric information comes from the fact that, in quite a few cases, waste generating firms conceal information on waste content from waste disposers, so that waste disposers do not know the content of the waste. Since precise information on waste content is indispensable for proper waste disposal, type I asymmetric information causes improper waste disposal. In this study, we examine the problem of improper waste disposal caused by the double asymmetry of information in the industrial waste treatment contract.