How to choose your job, your oncologist, your fund manager and you real-estate agent: improving information flows in markets

I’ll be giving a presentation with the above title at the University of Canberra tomorrow – Wednesday 27th of Sept in Room B34, Building 6 University of Canberra at 12:30 pm.

This is a repeat of a seminar I did at the ANU last year, but if you missed it and the title or abstract piques your interest, it would be good to see you there.

Abstract

We have long known and for commonsensical reasons that good information is critical to economic efficiency. Friedrich Hayek argued this within the ‘Austrian tradition’ of economics in prosecuting his case in the ‘socialist calculation debates’ of the 1930s. ‘Asymmetric information’ arrived as a substantial issue within the neoclassical tradition around thirty five years later with the work of theorists such as Kenneth Arrow, George Stigler, George Akerlof and Joseph Stiglitz.

Yet remarkably little attention has been given to the question of how to improve information flows. Hayek was interested in information within a debate on the relative merits of markets and central planning. Arguing for the former, he paid little attention to the shortcomings of information flows within markets. Within the economic mainstream, the market failures in information illustrated by Akelof and Stiglitz are frequently cited as a justification for interventions to mandate disclosure (for instance in consumer and investor markets). However such discussion rarely goes further and investigates the efficacy of alternative strategies.

Noting that:

  • information is often suppressed as commercial in confidence;
  • reputation is a principle means by which a market economy deals with ignorance about complex matters; and
  • regulation should focus as far as practicable on outcomes rather than inputs,

this paper argues for a new approach aimed at improving the rigour with which reputations are made.

The case for going beyond what we do now is strongest where asymmetric information is most rife as it is for instance in the provision of many professional services from medical services through to real estate agency and in the market for job satisfaction.

Right now most large firms regularly do survey work to gauge the satisfaction of their customers and their employees and identify opportunities to improve their performance. Such surveys could be standardised and the results published in a form which allowed ready comparison between firms.

Where outcomes of service provision can be objectively measured for instance the price achieved for houses, or the success rate of medical procedures a method of tendering is proposed by which service providers could tender for business by making predictions of the outcomes they could achieve, corrected for any systematic optimism or pessimism of past predictions. In addition to generating unbiased prognoses, the method could alleviate various perverse incentives generated by other attempts to measure the performance of service providers.

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Amused
Amused
15 years ago

Nice thinking Nicholas. That should sort the ‘markets as free speech/thinking’ faction, from the ‘markets as forces of nature/winners are grinners brigade.

anon
anon
15 years ago

Can people just show up on the day or is it necessary to book?

phil
15 years ago

Well tapping into one of my more persistent prejudices, are companies really interested in the satisfaction of their customers? If that was the case, companies would make more effort at keeping their current customers than gaining new ones, surely? The banks are a good example – the best deals are for people who switch; same applies to hospital/medical insurance companies. I note that the couple of magazine subscriptions I have also reward newly joining customers, not people who renew their subscriptions.

Also, what about the tendency to make it more difficult for customers to compare ostensibly similar products from different companies? Again, the insurance companies and also telephony providers seem to go to some lengths to make this difficult. Hence the rise of online services to assist in product choice, but how can one trust the advice? What type of disclosure is valid? This goes to the heart of your suggestion about mechanisms to confirm reputation.

hrvoje
hrvoje
15 years ago

Would you consider organising evening session? I’m sure there would be plently of takers who work full time!

Andrew Norton
Andrew Norton
15 years ago

Phil – Any company in a competitive environment is interested in customer satisfaction. But any continuing customer is presumably satisfied enough to at least not be bothered switching, while non-customers still need to be persuaded to try, hence the special deals.

Many people in business do of course have an intrinsic interest in the quality of their goods and services, but a strength of the market system is that it does not require this, since financial incentives are generally aligned with consumer interests. The interesting subjects Nick raises are in areas where this process can get confused because of information asymmetries (which incidentally, and this is often overlooked, go both ways – businesses have trouble finding out enough about their actual or would-be customers).

derrida derider
derrida derider
15 years ago

Nic,as you well know it’s not that consumers are more virtuous than producers. It’s that the purpose of of an economic system is to meet peoples’ wants – that is, we produce to consume, not consume to produce.

Any help for production has to answer the question “how does this ultimately benefit the consumer?” because it’s consumer welfare that is the measure of the system.