Sunday, November 26, 2006

A Question on Perfect Information

by The Dreamer

In economics understanding, moral hazard is happened because of imperfect information between economics agents. Due to this hidden information, the agents -who knows better- abuse this knowledge such that it affects the pay off of the another agents. Off couse this problem would not be exist if this knowledege is available to all agents. It is already analytically proved (by Stiglizt, Salanie, Dixit,etc.) that perfect information give higher social welfare rather than the imperfect information.

Now let me tell you two stories : If u ever think to change ur occupation to be a criminal, there are some notes u should remember :

1. Always clean all the trace, finger print, shoe print, etc. It is all can be used to take u down

2. Do ur plan carefully, observe, observe and observe . Most people have pattern. Rarely do this people break the pattern. Observe the pattern on the next victim

3. Do not expense all the money you just get.Do not put it into bank or in your house. Police can always have a search warrant into ur house. It is better to send it to Swiss Bank or ask people to have legitimate bussiness.

4. Do not change ur life habit

5. Provide a very good alibies, and stick with the alibies. Police can not do aything without a clear evidence.

6. etc..

Any man can learn and extend the list by wathich regularly the FBI files and True Crime Scene in discovery channel. (a police in Indonesia must also use the same method) More over, if you want to be a rob an empty house or car, you can just join the lock pocket society (here)/read the manual on the internet (here ) and buy the lock pick kit through internet. It is max US$30 for a standard kit (here , here )

By telling a first hand story on how FBI, any police agency, and Locks works, any people can beat the system and harm any other people. For sure the agency and the lock industry can always reserach for a better method to fight the crime or a better-and-uncraked key. But once the this new method implanted, thanks to the perfect information, any people can can spread the method to crack the new method. (I do not have any statistics on the proportions of crime solved (wrt total crime committed) in US before and after the FBI, true crime scene. If there is, we could do the empirical test)

Contradicted with the common knowledge, in these two situation, the higher the degree of perfect information, the higher the possibility of moral hazard. My point is perfect information is good. But there is always a people try to abuse this perfect information for their benefit in cost of other ( is also called moral hazard). May be something is just meant to be imperfect


pelantjong maja said...

it is because of imperfect information, the possibility of moral hazard would be higher. let's interpret the story in different way. suppose that those who open lock business in the internet are good guys. they intend to help people in the case that they lock themselves in car, house etc. those traders also assume that those who buy their stuffs will use it in a positive way.
but this is not the end of the story, in fact imperfect information do exist. above story shows that since trading occured in the internet, the traders dont know how the buyer is going to use the tools. at the same time, the buyers also dont know who the traders are. they might be groups of terrorist or freaks (who knows anyway).
i believe on imperfect information and if perfect information do exist it must prevent any harmful behavior. those traders who know that the tools are going to be used for crime, they could stop the transaction. the same with the costumers could stop raising money for the terrorist by not buying things.

Berly said...

In the first-best world, there is no thieves. So perfect information (and no lock) would increase everybody’s welfare. We still observe near perfect world with very (very) few crimes in the traditional society with little contact in the outside world or developed places like Singapore or Geneva.

But most of the cities in the world are the intermediate case between the extremes so we must search for the second best solution. The situation resemble an arms race where the police and lock maker trying to create the unbreakable (except with the rightful key) lock, while the thief and lock picker trying to crack it.

Brito (1972) is a seminar paper on Economics of Arms control that employed dynamic analysis and game theory. He found that with not too struck conditions, there is an optimal level of armament but mutual total disarmaments is unstable. So assuming an increasing cost to build more complex lock and increasing difficulty to crack it with stable value of goods inside, there is an optimal level of lock complexity and informational distribution.

If we use Spencer’s signalling model then a very complex lock is a signal for expensive items inside (thus, high expected benefit from cracking it). So the thief should look only for the lock whose complexity sufficiently high to cover his cost of learning to crack it. The lock owner would expect the thief to do so and put the expensive items in cheap lock. We can continue with the iterations but the owner can also introduce some uncertainty and randomize the lock choice.