Essay by Alex Tabarrok and Tyler Cowen: Might the age of asymmetric information – for better or worse – be over? Market institutions are rapidly evolving to a situation where very often the buyer and the seller have roughly equal knowledge. Technological developments are giving everyone who wants it access to the very best information when it comes to product quality, worker performance, matches to friends and partners, and the nature of financial transactions, among many other areas.
These developments will have implications for how markets work, how much consumers benefit, and also economic policy and the law. As we will see, there may be some problematic sides to these new arrangements, specifically when it comes to privacy. Still, a large amount of economic regulation seems directed at a set of problems which, in large part, no longer exist…
Many “public choice” problems are really problems of asymmetric information. In William Niskanen’s (1974) model of bureaucracy, government workers usually benefit from larger bureaus, and they are able to expand their bureaus to inefficient size because they are the primary providers of information to politicians. Some bureaus, such as the NSA and the CIA, may still be able to use secrecy to benefit from information asymmetry. For instance they can claim to politicians that they need more resources to deter or prevent threats, and it is hard for the politicians to have well-informed responses on the other side of the argument. Timely, rich information about most other bureaucracies, however, is easily available to politicians and increasingly to the public as well. As information becomes more symmetric, Niskanen’s (1974) model becomes less applicable, and this may help check the growth of unneeded bureaucracy.
Cheap sensors are greatly extending how much information can be economically gathered and analyzed. It’s not uncommon for office workers to have every key stroke logged. When calling customer service, who has not been told “this call may be monitored for quality control purposes?” Service-call workers have their location tracked through cell phones. Even information that once was thought to be purely subjective can now be collected and analyzed, often with the aid of smart software or artificial intelligence. One firm, for example, uses badges equipped with microphones, accelerometers, and location sensors to measure tone of voice, posture, and body language, as well as who spoke to whom and for how long (Lohr 2014). The purpose is not only to monitor workers but to deduce when, where and why workers are the most productive. We are again seeing trade-offs which bring greater productivity, and limit asymmetric information, albeit at the expense of some privacy.
As information becomes more prevalent and symmetric, earlier solutions to asymmetric problems will become less necessary. When employers do not easily observe workers, for example, employers may pay workers unusually high wages, generating a rent. Workers will then work at high levels despite infrequent employer observation, to maintain their future rents (Shapiro and Stiglitz 1984). But those higher wages involved a cost, namely that fewer workers were hired, and the hires that were made often were directed to people who were already known to the firm. Better monitoring of workers will mean that employers will hire more people and furthermore they may be more willing to take chances on risky outsiders, rather than those applicants who come with impeccable pedigree. If the outsider does not work out and produce at an acceptable level, it is easy enough to figure this out and fire them later on….(More)”