Regulation and Other Remedies

I’ve enjoyed this discussion, and it raises two issues I’d like to address. First, Joshua Gans says “it’s not the end of regulation.” But it is important to distinguish between the category of regulation and that of laws that are designed to facilitate market exchange, such as legal penalties to protect market participants when fraud occurs. Increasing penalties for changing a car’s odometer reading fall in the latter category. Market participants benefit from laws that protect them in transactions. These laws reduce the costs of engaging in transactions. Market participants know that they have some legal protection and recourse to court awards that reduce the size of the loss if they trade with a partner who engages in fraud. This reduces the costs of market transactions (such as buying a used car) and facilitates trade. These remedies are not in the same category as government interventions to protect consumers.

Gans seems to have more faith in a government agency when it comes to consumer protection than the market, despite the incentive problems associated with getting government agencies to act in the public interest. He talks about the need for government evaluation of front-loading washing machines, “designed so that with normal use over a number of years mold arises internally.” It is not clear that a government agency would be able to say much about those machines at their introduction, and the market consequences for firms that introduce shoddy products are severe. The evidence from the regulation of physicians is that agencies hide information from the public and fail to identify the majority of malfeasant physicians. Regulatory capture is a well-recognized phenomenon.

Gans suggests employees “who cannot prove they were working rather than shirking” will be sanctioned by a firm, making the workers “vulnerable to rent extraction.” I have to ask why it would be in the interest of the firm to adopt a policy that would tarnish its reputation in the labor market and subject it to potential law suits (for engaging in fraud) to try to extract rents from its employees? That can’t be good for morale, productivity, and profitability over time.

The second issue I’d like to address is Jeff Ely’s statement that, if “the age of asymmetric information is over…the age of markets will be over too.” The market is not simply, as Ely writes, “the most efficient system of collecting and aggregating asymmetric information,” it is much more. In their response, Cowen and Tabarrok point out that the end of asymmetric information is not the end of information costs which, of course, is true. What Ely is missing is that markets do much more than provide information to participants.

Cowen and Tabarrok aptly describe the role of the market’s price mechanism in their microeconomics principles text: “A price is a signal wrapped in an incentive.” In a free market, the price mechanism allocates resources by signaling participants (with prices) and encouraging them to move resources (with market incentives—profits and losses) to shift resources to their highest-valued use (as determined by consumers.) So the age of markets can’t be over unless there is some other, less costly, means to signal and motivate market participants to shift resources in response to changes in consumers’ tastes and preferences.

Also from this issue

Lead Essay

  • The End of Asymmetric Information by Alex Tabarrok and Tyler Cowen

    Tyler Cowen and Alex Tabarrok argue that the age of asymmetric information is coming to an end. In the traditional account, asymmetric information has some unfortunate effects: when the seller has much information and the buyer has little, only goods of poor quality generally appear on the market; they tend to be few in number, and they are bought mostly by rubes. Cowen and Tabarrok argue that this state of affairs, which may once have characterized the market for used cars, no longer obtains there – or in very many other places at all. Replacing it is a world of ubiquitous information, in which many regulations are no longer needed, but in which privacy concerns loom large.

Response Essays

  • It’s Not the End of Regulation by Joshua Gans

    Technology may or may not be eliminating asymmetric information. But either way, says Joshua Gans, regulation is here to stay. Whether it operates as a first line of resort or a last one, we ought not to do away with it entirely. From this perspective, technology should not so much abolish regulation as push it into the background and make less often invoked. Gans goes on to complicate the picture of technology delivering better information in the used car market: As cars become more reliable, they last longer, and they are more likely to go through multiple owners. The expansion of this market may have prompted technological developments in car-related information, rather than vice versa. Gans then turns to police body cameras, noting grimly that they only work when police themselves turn them on. He recommends pervasive citizen monitoring of authorities as the appropriate way to end this information asymmetry.

  • Asymmetric Information and Medical Licensure by Shirley V. Svorny

    Shirley Svorny looks at the ways that patients, doctors, and hospitals are using information in new ways - and calling old regulations into question. Whereas state medical licensure may have served a valuable purpose in the past, it is much less clear that it maintains the same importance today. Better information technology as well as changes to liability, certification, and malpractice underwriting have combined to offer much better information to all parties in medical care. Innovations such as retail clinics, telemedicine, and increased roles for non-physician clinicians all stand to improve the quality of medical care while also reducing costs. But a big obstacle commonly remains: the state licensing laws themselves.

  • Let’s Hope Not by Jeff Ely

    Jeff Ely takes a skeptical and Hayekian look at the idea that the age of asymmetric information is ending. He notes that improvements in information about health outcomes will not help solve the fundamental problems of risk sharing that the insurance market addresses. In Hayek’s way of thinking, markets exist above all because information is asymmetrical; if all players had all relevant information, market prices would be wholly unnecessary, and allocations would happen both voluntarily and without prices. That world is so utterly different from our own that it’s hard even to think about it for very long. It also shows no signs of materializing anytime soon.

The Conversation