Are sensors solving the “Akerlof problem”?

 •  Filed under technology

As consumers, we are so in love with getting (seemingly) free services in exchange for our data, that the new norm seems to be: “you have permission to track me, by default.” As an economist, I should welcome the fact that screening problems are becoming easier to solve. When an employer has the ability to watch more cheaply if the employee is working, that should allow more efficient production. The employer can reward those workers who are productive and sanction those who sleep at the desk.

But I think there are a number of complications with that rosy story that we need to work out.

An obvious concern is that a more efficient application of extrinsic incentives could backfire, because employees will resent monitoring. Well, if they don’t know that their browsing history and e-mailing habits are monitored, then maybe the benefits of monitoring can, locally, outweigh the costs.

But we shouldn’t ask “does this application to cheap tracking technologies benefit this firm?” -- instead, we should ask the equilibrium-type question: if every firm behaves this way, is that the type of labor market where we would like to work?

On a smaller scale, we have definitely opened the door. As the obsession with measurement seems to only be growing, companies, universities, and other entities will try to count the number of smiles, health status, the willingness to improve your health status, the number of unemployed Facebook friends connected to you (that must mean something is wrong with you) and all sorts of other “indicators” that will be annoying at first, but probably tolerated.

Two stories from today

Governments’ data collection trends are obviously not a subject of this post, but just today the WSJ reported that China will compile “tourist uncivilized behavior records” so that Chinese citizens who gamble or disrespect local customs abroad can be identified. The files "will be shared with Chinese authorities" including police, immigration, banks, and transportation administration, the article said.

The NYT ran a story titled Giving Out Private Data for Discount in Insurance. It quotes a consumer who said, proudly: "Every Saturday morning, just for playing golf, I get points." Glad to see he enjoys earning points. For other people, collecting a few cents or dollars could have crowd-out effects and make play feel more like work. Anyway, nothing wrong with a voluntary transaction here.

No more information asymmetries?

I have an intuition that the benefits of owning our data (having the freedom to choose how much to disclose) are probably underappreciated. Starting with this bias, I do look forward to reading. Cowen and Tabarrok’s The End of Asymmetric Information.

The summary seems to suggest that the Akerlof problem has been solved:

Sensors and reputation systems allow buyers to know what sellers know, principals to know what agents know, and vice-versa. Akerlof’s arguments have been overtaken. Any interested party can have access to information about product quality, worker performance, the nature of financial transactions.

Well, cars cannot vote on how carefully they are inspected. Reducing information rents when used cars are being sold seems like a no-brainer.

Humans — some economists need reminding — are not machines. As such, they tend to have an opinion about the degree of scrutiny that is appropriate.