Information Economics, Instrument of Analysis in New microeconomics
| Author | Maria Zenovia Grigore |
| Pages | 354-364 |
Maria Zenovia Grigore. Lecturer Ph.D., Economic Sciences Faculty, “Nicolae Titulescu” University, Bucharest (e-mail: mgrigore@univnt.ro).
Page 354
For a long time the sole economic representation of enterprise was provided by neoclassical model. Identified with a perfectly rational entrepreneur, the firm was reduced to the function of production and mechanically adapted to its environment. Reconsidering some hypotheses of this model (the lack of strategic interactions between agents, not considering the asymmetry of information and costs of transaction, the enterprise being considered a “black box”) led to renewing instruments of microeconomics analysis. This concerns game theory and information economics, which have as an objective the study of individual behaviour, integrating strategic interactions and informational flaws and preserving the traditional hypothesis of rationality.
Studying asymmetries of information with the help of game theory allows examining numerous problems neglected by traditional microeconomics, such as: advantages which can be obtained by more informed agents, the manner of markets’ functioning in the conditions of information asymmetry, loss of resources involved by the functioning of these markets etc.
This paper’s objective is to contribute to a better understanding of such problems and propose several manners of reducing risks generated by the information asymmetry.
Adverse selection was first studied by G. Akerlof (1970). After this date were effected numerous analysis of models concerning incomplete and asymmetric information structures, the most significant are those of M. Spence, who proposed the idea of signaling as solution to adverse selection, and J. Stiglitz, who pioneered the theory of screening.
Page 355
Moral hazard is studied in the frame of agency theory. First model of this theory was elaborated in 1976 by M. Jensen and W. Meckling. Ulterior researches focusing on reduction of moral hazard were concretized in thoroughness, generalizations and extensions of initial model.
The present paper analyses main concepts, models and solutions of information economics.
Information economics studies the behaviour of rational agents when the information is costly to obtain. In practice there are many markets where obtaining correct information is difficult: labour market, where employers could not a priori know the employees abilities, insurance market, where the insurer could not know the real status of good or person insured etc.
Models of economics information are, in their majority, models of partial equilibrium (the analysis is focused on one market, isolated by the rest of economy, on which a good or two are exchanged) and describe the interactions of a small number of agents, most often two, from whom one holds a private information and the other has no access to it and will be named uninformed party.
The New Microeconomics replaces the walrasian market with contract concept. A contract is a certain promise made between the two parties, in which are stated their obligations in any possible situation. The party that suggested the contract is named principal, and the contract accepter is named agent. The principal and the agent can be individuals, organizations, institutions.
The agent accepts the contract when the obtained utility as a consequence to signing it is larger than utility obtained by not signing it.
The situations in which one of the two parties has an informational advantage above the other make the object of three types of models. Thus, we are in the situation of moral hazard when the principal could not observe the agent’s action, in which case the solution is providing good incentives for agents in contractual clauses. The situation of adverse selection supposes that, before signing the contract, the agent holds relevant information to which the principal has no access. In this case the principal may propose to the agent several alternative contracts with the purpose of observing information by choosing a certain contract. In the situation in which one party holds important information and it transmits to the other party by using certain signals we therefore handle signaling models.
The term of adverse selection or adverse selection designates a negative effect of market functioning owed to some asymmetric information.
For example, when buyers could not observe the quality of good they wish to purchase, sellers have the interest to overestimate the quality of products for selling at the highest price possible. Buyers could not trust sellers’ declarations and could not develop the idea that a higher price means a better quality. In such conditions, sellers of good quality products with higher price value are found in the impossibility of selling product to their real price, for the buyers doubt their quality.
The problems of adverse selection appear when one of the participants to exchange could not observe any characteristic of exchanged good. Information is thus incomplete and asymmetric. In such conditions, the competiveness mechanism of neoclassical theory is no longer efficient. The price does not constitute a perfect signal of good value, for at the same price we obtain goods of different qualities. Such a thing has ill-fated consequences not only upon buyers, but also uponPage 356 sellers of good quality products, which can not signal the quality of their products free and credible. There are still mechanisms which can improve market functioning when the goods quality is imperfectly observable: signaling (the informed party takes initiative of revealing private information) and screening (when the uninformed party takes the initiative).
The adverse selection was studied for the first time by G. Akerlof (1970), which showed, starting from second-hand cars example, on what point a market can function less satisfactory in the absence of a mechanism to allow the informed party signaling the quality of goods it sells. The author started from the very simplified hypothesis that second hand car sellers could be classified in two categories: good (who sell satisfactory condition cars) and bad (who sell cars with serious problems). The possible buyers, without technical competence, are unable to appreciate the status of a car and, thus, choosing between good and bad vendors.
They are found facing a “moral hazard”. If the possible buyers are absolutely unable to distinct between good and bad occasions, it will be established a sole price of equilibrium for all occasion cars, corresponding to a medium price of bad cars. This thing would not satisfy good vendors and might lead to the collapse of the market.
Good vendors can then choose to transmit a signal to buyers, adopting an activity which bad vendors would not have the interest to follow, for proving to be expensive for them. An adequate signal is therefore expensive, and the cost is bigger with the low quality of car. This signal could provide a guarantee which time and length (spare parts, workers and cost of vehicle damage) will be settled to establish “separation equilibrium”. This expression marks the fact that the signal was constituted such that bad vendors will not have the interest to express, for a buyer can choose with efficacy between them and good vendors.
Another possible solution, in which cost will be assumed by the buyer, is to use the services of an expert to issue a quality permit over the car. Though, a positive notice of the expert does not involve the certainty of a good car.
G. Akerlof’s model could apply to numerous situations. He shows the laisse – faire has many negative consequences: eliminating quality products and even the absence of exchange. In this frame of happenings, a regulation to assure total or partial revelation of information or to institute efficient procedures against bad quality product...
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