One profound yet uncelebrated byproduct of the digital revolution is the mitigation of information asymmetry. Information asymmetry, in simple terms, is when one person knows something another does not. Information asymmetry can result in many market inefficiencies, meaning that less information asymmetry leads to more efficiency. The Cato Institute recently explored the economic benefits of more information in our economy. They provide examples of government regulation overcoming some information asymmetry problems, such as laws that preserve the accuracy of cars’ odometers to provide customers with more accurate information in the used car market. Increasingly, more sensors and data are illuminating more and more information without the need of government intervention, e.g. car insurers providing discounts to drivers who allow companies to track driving behavior to better calculate risk.
In our discussions about Anonymous, we focused on the decentralized, random nature of the group. Equally integral to its operating capability is a high degree of organization, in the form of reputation systems. Such systems emerge organically in a space where people need to trust one another. Experienced Anonymous mods and hackers, who have been known to the community for some time and developed a high level of trust, are important to the organization. Cato explores reputation systems as an example of diminished information asymmetry:
In recent times, information technology has made it easier to observe a seller’s reputation and to contribute to the formation of a seller’s reputation at low cost. Yelp, Angie’s List, and Amazon Reviews all make it easy for past buyers to report their observations on seller quality and for future buyers to observe a seller’s accumulated reputation. And of course it is not just sellers who are rated but workers too are evaluated in a variety of ways; for instance many employers check a worker’s credit rating, or on-line history, before making a hire. We may be creating some privacy problems with these techniques, but the old school issues of asymmetric information are drying up rapidly.
Early reputation mechanisms were one-way, namely that buyers would generate reputations for sellers, but now the ratings often go both ways. Many of the exchanges in the sharing economy, including Uber (transportation), Airbnb (accommodations), and Feastly (cooks) use two-way reputational systems. That is the customer rates the Uber driver, but in turn the Uber driver rates the customer. Dual reputation systems can support a remarkable amount of exchange even in the absence of law or regulation. The Silk Road marketplace for illegal goods, for example, supported millions of dollars of exchange through a dual reputation system. On the Silk Road it was possible to pay for goods in advance of delivery or to buy goods which were delivered before payment was made. In each case, honesty was maintained through reputation even without legal recourse for contract breach. Thus, in these cases reputation maintained quality even when theories of information asymmetry would have predicted the problematic nature of any exchange at all.
Reputation is only one type of information made possible by the digital revolution. Many more are organically developing in areas where a need for more information exists.