The phrase caveat emptor (“Let the buyer beware” in Latin) and its use as a disclaimer of warranties arise from the fact that buyers typically have less information about the good or service they are purchasing, while the seller has more information. The quality of this situation is known as information asymmetry. Defects in the good or service may be hidden from the buyer, and only known to the seller.

Information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This asymmetry creates an imbalance of power in transactions, which can sometimes cause the transactions to go awry, a kind of market failure in the worst case. Examples of this problem are adverse selection, moral hazard, and information monopoly.