Information Asymmetry

The essay discusses intelligence asymmetry.

The paper discusses how the unequal availability of information among different parties can influence their decisions, as well as how rewards influence people’s economic activities. The author provides an explanation of how prohibiting the testing of credit ratings resulted in less opportunities for the poor. According to the source, the state of Washington has enacted legislation to ensure that minorities have equal opportunities for jobs. However, by prohibiting the use of credit ratings, the laws required employers to use other metrics to assess prospective workers’ suitability for the advertised positions. Employers embarked on using education and experience, both of which are hard for the minority groups in the USA to access. The use of other indicators made it more difficult for blacks and other disadvantaged groups to get employment. The credit scores are a good way of knowing good employees because credit scores do not change and those with good credit ratings are likely to be good employees (The Economist). The absence of a visible source of information has created an asymmetry of information, similar to the one that occurs when buying and selling used cars in which the quality of cars is known only to sellers. Therefore, those who sell bad cars at low prices, and those who have good ones, adhere to their high prices; therefore, there are not enough customers, because all buyers expect that cars have hidden problems.

What the Author Is Saying

The author of the article is trying to say that laws passed by states that banned the use of credit scores while employing people removed an apparent source of information, hence creating situations characterized by information asymmetry. Therefore, both good and bad employees competed in education and experience, both of which are hard for disadvantaged people to attain. The author uses the theory that won for Mr. Akerlof a Nobel peace prize (The Economist). According to the theory, the unequal availability of information among industries like second-hand car sales and insurance leads to unfairness in the market.

Connection with Class Learning

According to the knowledge from class, several principles affect the interaction of the choices of individuals. One of them is that trades involve gains. Second, markets move toward equilibrium because people respond to the incentives available for them; also, resources should be used efficiently to attain benefit. Another principle is that people take advantage of incentives leading to inefficiencies in markets. Then governments should intervene to make markets effective (O’Sullivan, Sheffrin & Perez, 89). The article reports about how the intervention by the state was meant to make the job market fair to the minorities by removing the need to check credit scores. Thus, so that people from disadvantaged groups get access to jobs. Nevertheless, because of the fact that people take advantage of incentives for their own gain, even people with lesser qualifications exploited the law resulting in lesser chances for the qualified employees from marginalized ethnicities. The author also gives an example of the insurance industry to show how people exploit the incentives in the economy. According to the author, lower premiums cover less risk and, therefore, favor careful drivers. High premiums cover a lot of risks and, therefore, support careless driving. Consequently, careless drivers are likely to take advantage of high premiums that offer more coverage, and the less dangerous drivers are likely to take the lower premiums leaving some insurers with only high-risk takers (The Economist).

Whether True or Not

The argument by the author is agreeable because it offers real-life examples. It is true that the removal of the credit score requirement was an incentive to get more minorities employed, but instead less qualified workers took advantage of the situation, leading to the failure of the policy.

Works Cited

O’Sullivan, Arthur, Steven Sheffrin & Stephen Perez (2008). Economics: principles, applications, and tools. Pearson Education.

The Economist. “Secrets and agents.” The Economist, 23 July 2016. . Accessed 12 May 2017.