BSA CORE 1

MANAGERIAL ECONOMICS

MODULE 15
Wednesday

VALUE OF INFORMATION

Policy battles over information

 Welfare may be increased by requiring disclosures – market equilibrium
disclosures do not suffice
 Welfare may be increased by requiring trading in markets
o So long as they are adequately capitalized (joint and several liability of
market participants) improves decentralizability
Securitization
 Entailed delegation of different aspects of information gathering and analysis to
different entities
 To work, required complex contracts (putbacks, warranties)
 Failed because of massive fraud
 But subsequently, massive costs of contract enforcement
 Highlighting issues of contracts and enforcement noted earlier
 And important role of government in information markets in preventing fraud
Other aspects of financial sector regulation
 Much of financial activity (profits) is associated with market exploitation, much of
which would not arise in presence of perfect information
 Exploiting asymmetries of information (including creating information
 asymmetries)
o Market manipulation
o Increasing complexity (disparity between social and private returns in
increasing complexity)
 Increased complexity even gave rise to new opportunities for hard‐to‐
 detect fraud
o Banks availed themselves of these opportunities
o High legal costs, statutes of limitations, political capture made it difficult to
prosecute
Governance is crucial
 Who makes the decisions, and the rules under which the decisions are made
 In AD model, no real governance issue—simply maximize value

Source: https://www8.gsb.columbia.edu/faculty/jstiglitz/sites/jstiglitz/files/Revolution%20of
%20Information%20Economics.pdf
  With imperfect information/risk markets matters whose judgments are decisive,
how different judgments are “aggregated”
 True in public and private sector
o Example: monetary policy

Further risks
 Move to “information economy” may give market power to those who dominate in
grabbing information
o Google, Facebook, others
o Distorts both the markets for goods and services (increased ability to price
discriminate) and innovation (innovation in areas where there is high
potential for grabbing rents based on information)
 Extent to which this occurs will be determined by rules of the game
o Privacy rights, who owns one’s data

New technology
 Network effects and increasing role of knowledge may naturally lead to more
scale economies, market imperfections
o Understanding of behavioral economics, theory of discrimination, plus
access to new data enhances ability to exploit market power
o May have enhanced ability of incumbents to persist (Newbery‐Stiglitz), in
spite of some instances of disruptive technology
o May help explain increased concentration and persistence

Conclusion
 Information economics has had a transformative effect on economics and
economic policy
o Directly giving rise to new sub‐branches of economics—contract theory
o Providing explanations of phenomena that previously had been
unexplained
o Highlighting the importance of institutions, and explaining the existence
and structure of some institutions
o Its failures/limitations encouraging the development of behavioral
economics
o Together with other work, suggesting that the economy best be viewed
through models which highlight market power and exploitation (rather than
through the lens of the competitive equilibrium model

Source: https://www8.gsb.columbia.edu/faculty/jstiglitz/sites/jstiglitz/files/Revolution%20of
%20Information%20Economics.pdf
  Questioning - and in many cases reversing – longstanding presumptions of
economic policy
o The presumption is that market economies are not efficient
o With pervasive market power (some associated with imperfections of
information), interventions can typically increase efficiency and equity
ASSIGNMENT (PARTNER)
CASE: Battery Company

Battery Company started in 1980 and became the leading manufacturer of car batteries in the
Philippines market. Since then, it has been under the charge of Mr. Reyes, the founder-owner of the
firm. In 2000, the company decided to go for a diversification by expanding the product line. The new
product was batteries for fork-lift trucks. At the same time, Mr. Marcus was appointed the Senior Vice
President of marketing in the company. However, soon after its successful diversification into fork-lift
batteries, the sales in this segment began dropping steadily. Mr. Marcus wanted to introduce some
radical changes in the advertising and branding of the new business but the proposal was turned down
by the old-fashioned Mr. Reyes. In 2002, the firm is losing heavily in the fork-lift batteries business and
its market share in car batteries is also on a decline. Mr. Reyes has asked Mr. Marcus to show a
turnaround in the company within a year.

Question: What steps should Mr. Marcus take to take the company out of its troubles? Justify your
answer.

Source: https://www8.gsb.columbia.edu/faculty/jstiglitz/sites/jstiglitz/files/Revolution%20of
%20Information%20Economics.pdf