Adverse Selection is a market failure that occurs when information asymmetry causes the less desirable participants in a market to be more likely to engage in transactions, driving out the more desirable participants. First formally described by George Akerlof in his 1970 "Market for Lemons" paper (for which he received the Nobel Prize), it explains why used car markets, insurance markets, and hiring can systematically fail to function efficiently.
The Principal-Agent Problem arises when one party (the agent) acts on behalf of another (the principal) but has different interests, information, and incentives. The principal can't perfectly observe the agent's actions or effort, creating opportunities for the agent to act in their own interest rather than the principal's. Central to economics, law, and management, it explains why managers may not act in shareholders' interests, why doctors may over-prescribe, and why employees may shirk.
Signaling Theory explains how credible communication occurs when information is asymmetric — when one party knows something the other doesn't. Because cheap talk is cheap (anyone can claim anything), credible signals must be costly to fake. College degrees signal ability partly through their cost; luxury goods signal wealth; warranties signal product quality; corporate offices signal permanence. The signal's credibility depends on its cost being higher for low-quality mimics than for high-quality genuines.