Asymmetric Information: Response

At Cato Unbound Tyler and I respond to comments on our End of Asymmetric Information piece. Here is one bit:

It is important to remember that the opposite of asymmetric information is symmetric information, not perfect information. That is a simple distinction, yet it’s one that many commentators, such as David Auerbach writing at Slate, fail to recognize. Information will always be imperfect. Uncertainty and risk will never be banished. Uncertainty and risk, however, do not in general create market failure (indeed in the case of insurance and gambling, uncertainty and risk create markets).

We don’t even have perfect information about our own tastes. In this setting, when one of us orders a product that does not meet our expectations, what do we do? Most of the time, we return it. Rather than living in a world dominated by moral hazard, we live in a world dominated by firms so eager to sell quality products that they will often guarantee our satisfaction or take the product back for any reason with full refund (sometimes less postage).

….As Hayek emphasized, the market does not require perfect knowledge to function, rather it is the means by which imperfect knowledge is made to function in the social interest.

We discuss some more implications of the leveling of information such as why renting durables will become more common, and we explain why price discrimination is consistent with and in some cases implied by the reduction of asymmetric information. We also discuss what types of regulation we need more of and what types less, and how the level of asymmetric information is consistent with Hayek’s emphasis on markets and dispersed knowledge.


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