Two weeks ago, Tyler Cowen and Alex Tabarrok published a fantastic essay on the end of asymmetric information, its affect on markets, and how policy makers should respond. There are lots of takeaways from the essay, but Cowen and Tabarrok’s theory on the ‘cost’ of privacy is my favorite. I will probably write on that idea later, but you should read the article for everything else in it. Here is my general summary:
Largely thanks to the Internet and the information economy, people/businesses now know the true costs of products and services, allowing markets to internalize problems previously handled by government intervention. Possibly more important, Cowen and Tabarrok argue how increased information symmetry evens the playing field between consumers and producers in terms of bargaining and benefits.
Cowen and Tabarrok note that prior to widespread information symmetry, producers held most of the information in market exchanges. Businesses knew how much their good was worth, not the buyers, and this information gap benefited producers in the form of extra profits. However, this problem went both ways, especially with the employer-employee relation. In many cases, employers can not easily monitor the work and efficiency of employees. To compensate against this, employers would often pay employees above the value of their labor to incentivize adequate productivity. In both instances, these behaviors fit the description of rent seeking, an activity where an individual/group gains additional benefits at the cost of another through institutional structures.
The scenarios just described show the consequences of asymmetric information, where access to information is unequal between two or more interacting parties. This gap in information causes markets to operate sub-optimally by allowing groups/individuals to benefit at the cost of others and/or because uninformed market transactions create inefficient behaviors and results.
While more easily achieved with asymmetric information, rent seeking becomes extremely difficult as the availability of information rises. With the advent of the Internet and information markets, individuals on both side of the spectrum can now leverage more information in their decision making. From the computers in your car, apps such as Yelp, and information services like Kelly Blue Books, market exchanges increasingly witness the effects of information symmetry.
Despite the immense benefits gained by society, Cowen and Tabarrok rightfully mention how symmetric information became possible only because of more invasive technology. Privacy becomes victim in a world benefiting from the monetization of information. Cowen and Tabarrok also theorize that individuals who preserve their privacy lose out from the benefits of information symmetry because they will appear suspicious for refusing to reveal their preferences/history or they cannot access the information available by excluding themselves from the information market.
Cowen and Tabarrok close their essay with the suggestion that most legislation aims at problems that are either solved already within the market or that do not exist anymore. Consequentially, the authors also suggest that regulations be decreased in general to increase efficiency and economic prosperity, and that new regulations include clauses that allow them to expire after a certain date.