Information economics

Not to be confused with Information economy.
Part of a series on
Economics
Branches and classifications
Concepts, theory and techniques
By application
Notable economists
Lists

Information economics or the economics of information is the branch of microeconomics that studies how information and information systems affect an economy and economic decisions.[1]

One application considers information embodied in certain types of commodities that are "expensive to produce but cheap to reproduce."[2] Examples include computer software (e.g., Microsoft Windows), pharmaceuticals and technical books. Once information is recorded "on paper, in a computer, or on a compact disc, it can be reproduced and used by a second person essentially for free."[2] Without the basic research, initial production of high-information commodities may be too unprofitable to market, a type of market failure. Government subsidization of basic research has been suggested as a way to mitigate the problem.[2]

The subject of "information economics" is treated under Journal of Economic Literature classification code JEL D8 – Information, Knowledge, and Uncertainty. The present article reflects topics included in that code. There are several subfields of information economics. Information as signal has been described as a kind of negative measure of uncertainty.[3] It includes complete and scientific knowledge as special cases. 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[4] and their implications for contract theory, including market failure as a possibility.[5]

Information economics is formally related to game theory as two different types of games that may apply, including games with perfect information,[6] complete information,[7] and incomplete information.[8] Experimental and game-theory methods have been developed to model and test theories of information economics,[9] including potential public-policy applications such as mechanism design to elicit information-sharing and otherwise welfare-enhancing behavior.[10]

An example of game theory in practice would be if two potential employees are going for the same promotion at work and are conversing with their employer about the job. However, one employee may have more information about what the role would entail then the other.[11] Whilst the less informed employee may be willing to accept a lower pay rise for the new job, the other may have more knowledge on what the role's hours and commitment would take and would expect a higher pay. This is a clear use of incomplete information to give one person the advantage in a given scenario. If they talk about the promotion with each other in a process called colluding there may be the expectation that both will have equally informed knowledge about the job. However the employee with more information may mis-inform the other one about the value of the job for the work that is involved and make the promotion appear less appealing and hence not worth it. This brings into action the incentives behind information economics and highlights non-cooperative games.[11]

  1. ^ • Beth Allen, 1990. "Information as an Economic Commodity," American Economic Review, 80(2), pp. 268–273.
      • Kenneth J. Arrow, 1999. "Information and the Organization of Industry," ch. 1, in Graciela Chichilnisky Markets, Information, and Uncertainty. Cambridge University Press, pp. 20–21.
       • _____, 1996. "The Economics of Information: An Exposition," Empirica, 23(2), pp. 119–128.
       • _____, 1984. Collected Papers of Kenneth J. Arrow, v. 4, The Economics of Information. Description and chapter-preview links.
       • Jean-Jacques Laffont, 1989. The Economics of Uncertainty and Information, MIT Press. Description Archived 2012-01-25 at the Wayback Machine chapter-preview links.
  2. ^ a b c Samuelson, Paul A., and William D. Nordhaus (2001). Economics, p.194.
  3. ^ Kenneth J. Arrow, 1996. "The Economics of Information: An Exposition," Empirica, 23(2), pp. 120–21.
  4. ^ Charles Wilson, 2008. "adverse selection," The New Palgrave Dictionary of Economics, 2nd Edition.
  5. ^ • John O. Ledyard, 2008. "market failure," The New Palgrave Dictionary of Economics, 2nd Ed.
       • Armen A. Alchian and Harold Demsetz, 1972. "Production, Information Costs, and Economic Organization," American Economic Review, 62(5), pp. 777–795.
       • Sanford J. Grossman and Joseph E. Stiglitz, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, 70(3), pp. 393–408 Archived 2012-04-04 at the Wayback Machine.
       • Stiglitz, Joseph E. (2008). "Information". In David R. Henderson (ed.). Concise Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economics and Liberty. ISBN 978-0865976658. OCLC 237794267.
       • _____, 1987. "The Causes and Consequences of the Dependence of Quality on Prices," Journal of Economic Literature, 25(1), pp.1–48.
       • _____, 2000. "The Contributions of the Economics of Information to Twentieth Century Economics," Quarterly Journal of Economics, 115(4), pp. 1441–1478.
       • _____, 2002. "Information and the Change in the Paradigm in Economics," American Economic Review, 92(3), pp. 460–501[dead link‍]. from Nobel Prize Lecture Archived 2011-05-10 at the Wayback Machine, December 8, 2001.
  6. ^ Jan Mycielski, 1992. "Games with Perfect Information," Handbook of Game Theory with Economic Applications, v. 1, Elsevier, ch. 3, pp. 41–70.
  7. ^ • Adam Brandenburger, 2008. "epistemic game theory: complete information," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
       • Sylvain Sorin, 1992. "Repeated Games with Complete Information," Handbook of Game Theory with Economic Applications, v. 1, Elsevier, ch. 4, pp. 71–107.
  8. ^ • Aviad Heifetz. 2008. "epistemic game theory: incomplete information,"The New Palgrave Dictionary of Economics, 2nd Edition.
       • Robert J. Aumann and Aviad Heifetz, 2002. "Incomplete Information," Handbook of Game Theory with Economic Applications, v. 3, Elsevier, ch. 43, pp. 1665–1686.
       • Shmuel Zamir, 1992. "Repeated Games of Incomplete Information: Zero-Sum," Handbook of Game Theory with Economic Applications, v. 1, Elsevier, ch. 5, pp. 109–154.
       • Françoise Forges, 1992. "Repeated Games of Incomplete Information: Non-Zero-Sum," Handbook of Game Theory with Economic Applications, v. 1, Elsevier, ch. 6, pp. 155–177.
  9. ^ • S. S. Lippman, and J. J. McCall, 2001. "Information, Economics of," International Encyclopedia of the Social & Behavioral Sciences, pp. 7480–7486.
       • Eric Rasmusen, 2007. Games and Information, 4th ed. Description and chapter-preview links.
       • Charles R. Plott and Vernon L. Smith, 2008. Handbook of Experimental Economics Results, v. 1, Elsevier, Part 2: Market Economics of Uncertainty and Information and Part 4: Games, respectively, chapters 34–40 & 45–66 preview links.
       • Karl-Gustaf Löfgren, Torsten Persson, and Jörgen W. Weibull, 2002. "Markets with Asymmetric Information: The Contributions of George Akerlof, Michael Spence and Joseph Stiglitz," Scandinavian Journal of Economics, 104(2), pp. 195–211 Archived 2012-04-25 at the Wayback Machine.
  10. ^ • Roger B. Myerson, 2008. "mechanism design," The New Palgrave Dictionary of Economics, 2nd Edition.
       • _____, 2008. "revelation," principle," The New Palgrave Dictionary of Economics, 2nd Edition.
       • _____, 2008. "Perspectives on Mechanism Design in Economic Theory," American Economic Review, 98(3), pp. 586–603 Archived 2012-05-25 at the Wayback Machine. Revised from Nobel-prize lecture.
       • Noam Nisan and Amir Ronen, 2001. "Algorithmic Mechanism Design," Games and Economic Behavior, 35(1–2), pp. 166–196.
  11. ^ a b Lippman, S. S.; McCall, J. J. (2001-01-01), "Information, Economics of", in Smelser, Neil J.; Baltes, Paul B. (eds.), International Encyclopedia of the Social & Behavioral Sciences, Oxford: Pergamon, pp. 7480–7486, doi:10.1016/b0-08-043076-7/02244-0, ISBN 978-0-08-043076-8, retrieved 2022-05-02