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Information economics is a branch of microeconomic theory (classified under JEL code D8) that studies how information affects economic decisions. Information is special because it is so easy to spread, but so hard to control. It is easy to create, but hard to trust. And it influences many of our decisions. These special aspects of information (as compared with other types of goods) complicate many standard economic theories. Microeconomics is a branch of Economics that studies how individuals, households, and firms make decisions to allocate limited resources,[1] typically in markets where goods or services are being bought and sold. ...
Articles in economics journals are usually classified according to the system used by the Journal of Economic Literature (JEL). ...
There are several subfields of information economics. The first insights in information economics related to the economics of information goods. In recent decades, there have been influential advances in the study of information asymmetries and their implications for contract theory. Finally, with the rise of computers, economists have begun to study economics of information technology. In economics, information asymmetry occurs when one party to a transaction has more or better information than the other party. ...
Contract theory comprises many different theories and various interpretations of the various body of rules and subrules that define Contract Law. ...
Information asymmetry
Information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance in power in transactions which can sometimes cause the transactions to go awry. Examples of this problem are Adverse selection and Moral hazard. In economics, information asymmetry occurs when one party to a transaction has more or better information than the other party. ...
Adverse selection or anti-selection is a term used in economics and insurance. ...
This section is studied by Argagui monopoli In law and economics, moral hazard is the name given to the risk that one party to a contract can change their behaviour to the detriment of the other party once the contract has been concluded. ...
A classic paper on adverse selection is George Akerlof's The Market for Lemons. There are two primary solutions to this problem, signalling and screening. George Arthur Akerlof (born June 17, 1940) is an American economist and Koshland Professor of Economics at the University of California, Berkeley. ...
The Market for Lemons: Quality Uncertainty and the Market Mechanism is a paper by George Akerlof written in 1970 that established the fundamentals of asymmetrical information theory. ...
Signaling Michael Spence originally proposed the idea of signaling. He proposed that in a situation with information asymmetry, it is possible for people to signal their type, thus believably transferring information to the other party and resolving the asymmetry. Michael Spence (born November 7, 1943) is an American-born, Canadian-raised economist and recipient of the 2001 Nobel Memorial Prize in Economics, along with George A. Akerlof and Joseph E. Stiglitz, for their work on the dynamics of information flows and market development. ...
In economics, more precisely in contract theory, signaling is the idea that one party (termed the agent) conveys some meaningful information about itself to another party (the principal). ...
This idea was originally studied in the context of looking for a job. An employer is interested in hiring a new employee who is skilled in learning. Of course, all prospective employees will claim to be skilled at learning, but only they know if they really are. This is an information asymmetry.
Spence proposed that going to college can function as a credible signal of an ability to learn. Assuming that people who are skilled in learning can finish college more easily than people who are unskilled, then by attending college the skilled people signal their skill to prospective employers. This is true even if they didn't learn anything in school, and school was there solely as a signal. This works because the action they took (going to school) was easier for people who possessed the skill that they were trying to signal (a capacity for learning).
Screening Joseph E. Stiglitz pioneered the theory of screening. In this way the underinformed party can induce the other party to reveal their information. They can provide a menu of choices in such a way that the choice depends on the private information of the other party. Joseph Stiglitz (born February 9, 1943) is an American economist and a member of the Columbia University faculty. ...
We dont have an article called Screening (economics) Start this article Search for Screening (economics) in. ...
Information goods Buying and selling information is not the same as buying and selling most other goods. First of all, information is non-rivalrous, which means that consuming information doesn't mean that someone else cannot also consume it. Obviously this does not apply to normal goods, like food, in which my consumption precludes yours. In economics, a good is considered rivalrous if its consumption by one person prevents it from being available to others. ...
A related characteristic that alters information markets is that information has almost zero marginal cost. This means that once the first copy exists, it cost nothing or almost nothing to make a second copy. This makes it easy to sell over and over. However, it makes classic marginal cost pricing completely infeasible.
Second, exclusion is not a natural property of information goods. It is possible to construct exclusion (for example, some articles in Wikipedia cannot be edited unless you are logged in). However, the nature of information is that if it is known, it is difficult to exclude others from its use. Since information is likely to be both non-rivalrous and non-excludable, it is frequently considered an example of a public good. Excludability is defined in economics as whether or not it is possible to exclude people who have not paid for a good or service from consuming it. ...
In economics, a public good is a good that is non-rivalrous and non-excludable. ...
Third, and most ironic, is that the information market does not exhibit high degrees of transparency. That is, to evaluate the information you have to know it, so you have to invest in learning it to evaluate it. To evaluate a bit of software you have to learn to use it; to evaluate a movie you have to watch it.
The importance of these properties is explained by Froomkin, in The Next Economy.
Bundling One method of taking advantage of information goods is bundling. That is the strategy of grouping multiple items together and selling them as a group. Bundling allows sellers to better predict the demand for the bundle. While it is difficult to know which items in the group an individual person wants, they are likely to value some of the items enough to purchase the bundle, even if they don't value any of the items enough to buy it separately. However, this only works when it doesn't cost much to sell extra items in a bundle that are unwanted. Information goods fit this profile since it doesn't cost anything to make extra copies. Product bundling is a marketing strategy that involves offering several products for sale as one combined product. ...
More Information In 2001, the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel was awarded to George Akerlof, Michael Spence, and Joseph E. Stiglitz for their contributions to the theory of the economics of information.[citation needed] Year 2001 (MMI) was a common year starting on Monday (link displays the 2001 Gregorian calendar). ...
The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (in Swedish Sveriges Riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is a prize awarded each year for outstanding intellectual contributions in the field of economics. ...
George Arthur Akerlof (born June 17, 1940) is an American economist and Koshland Professor of Economics at the University of California, Berkeley. ...
Michael Spence (born November 7, 1943) is an American-born, Canadian-raised economist and recipient of the 2001 Nobel Memorial Prize in Economics, along with George A. Akerlof and Joseph E. Stiglitz, for their work on the dynamics of information flows and market development. ...
Joseph Stiglitz (born February 9, 1943) is an American economist and a member of the Columbia University faculty. ...
See also George Arthur Akerlof (born June 17, 1940) is an American economist and Koshland Professor of Economics at the University of California, Berkeley. ...
Michael Spence (born November 7, 1943) is an American-born, Canadian-raised economist and recipient of the 2001 Nobel Memorial Prize in Economics, along with George A. Akerlof and Joseph E. Stiglitz, for their work on the dynamics of information flows and market development. ...
Joseph Stiglitz (born February 9, 1943) is an American economist and a member of the Columbia University faculty. ...
Contract theory comprises many different theories and various interpretations of the various body of rules and subrules that define Contract Law. ...
Adverse selection or anti-selection is a term used in economics and insurance. ...
This section is studied by Argagui monopoli In law and economics, moral hazard is the name given to the risk that one party to a contract can change their behaviour to the detriment of the other party once the contract has been concluded. ...
In economics, more precisely in contract theory, signaling is the idea that one party (termed the agent) conveys some meaningful information about itself to another party (the principal). ...
We dont have an article called Screening (economics) Start this article Search for Screening (economics) in. ...
Product bundling is a marketing strategy that involves offering several products for sale as one combined product. ...
Literature - Akerlof, G. (1970). The market for lemons: quality uncertainty and the market mechanism. Quarterly Journal of Economics 84 (3), 488-500.
- Birchler, U.W., and M. Bütler (2007). Information Economics. London, Routledge. ISBN 978-0415373463
- Maasoumi, Esfandiar (1987). "Information theory," The New Palgrave: A Dictionary of Economics, v. 2, pp. 846-51.
- Mas-Colell, Andreu; Michael D. Whinston, and Jerry R. Green (1995), Microeconomic Theory. Oxford University Press. Chapters 13 and 14 discuss applications of adverse selection and moral hazard models to contract theory.
- Shapiro, Cark, and Hal R. Varian (1999). Information Rules: A Strategic Guide to the Network Economy. Harvard University Press. (publisher's excerpts)
- Spence, A.M.: "Job Market Signaling", Quarterly Journal of Economics 83 (1973), pp. 355-377.
- Stigler, George J. (1961). “The Economics of Information,” Journal of Political Economy, June. (JSTOR)
- Theil, Henri (1967). Econonomics and Information Theory. Amsterdam, North Holland.
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