Question

There are many jokes about the laziness of civil servants. Do you think that those jokes contain an element of truth? Let us, for the sake of argument, suppose that government officials are lazier than employees working for a business firm.Can you explain this phenomenon by using the concepts of hidden information and hidden action?

Reference

Information has been as an economic good, deriving its value from its scarcity. Under perfect competition, prices act as sufficient statistics for conveying all the necessary information to the market parties.

If goods are not homogeneous, for instance, it may be necessary to signal a quality dimension to potential buyers. The price mechanism is often insufficient for conveying such information.

Particularattention has been paid to situations of information asymmetry. In such situations, information is unevenly distributed. This introduces the risk that some economic players will use their informational advantage to gain an economic advantage in executing transactions.

In the economics of information, a fundamental distinction is made betweenex anteandex postinformation problems.

Adverse selection (or hidden information) is anex anteinformation problem. It arises when one party has private information that is relevant to a potential transaction.

Private information is unobservable to the other party. In the case of adverse selection, the private information already existsbeforeparties agree to execute a transaction.

Markets and organizations offer different solutions, however, to the information problems inherent in adverse selection.

Moral hazard (or hidden action) can also develop in both market and organizational settings. This concept refers to anex postinformation problem. It appliesafterparties have agreed to execute a transaction. Hidden information and hidden action both pertain to private information that one of the parties in a transaction may possess.

In the case of hidden action, this information concerns unobservable behaviour of one of the parties in executing the transaction. This information is valuable as it would affect the terms of the trade, if the other party were aware of it. However, the party with private information has no incentive to disclose it. Again, markets and organizations offer different solutions for overcoming the problem of hidden action.

It was shown how we should distinguish between decisions where complete information can be obtained (removing all uncertainty) and decisions under conditions of remaining uncertainty (with incomplete information).

In both cases we made use of a decision tree to sketch the decision context. The decision tree depicted a game of one individual playing against Nature.

Finally, we explored information as an economic good. Just like other economic goods, information has to be produced and its value will only become clear after production.

However, information is non-rival: this means that my use of it does not preclude your simultaneous use of the same information.

Moreover, information can be reproduced at low (near zero) marginal costs. These two characteristics distinguish information goods from other economic goods.

They also imply that the production (and use) of informational goods are subject to large economies of scale. Markets of information goods may therefore exhibit 'winner-takes-all' features.

Platform organizations which realize the economies of scale on winner-takes-all markets will show a tendency to become monopolies. This is just one example of societal challenges that are generated by the ongoing digital revolution.