The title of this post refers to an excellent book edited by Dan Klein and Fred Foldvary, The Half-Life of Policy Ideas: How New Technologies Affect Old Policy Problems.
The book looks at how many arguments given to justify state intervention – such as public goods arguments – are not realistic. They can often be subject to technical limitations. As new technologies develop, problems related to public goods or common-pool resources can be removed, and the justification for government intervention eliminated along with them.
An example of this that I recently experienced is related to asymmetric information. If there is asymmetric information in the market, one group has more information related to the activity than the other group. This can lead to inappropriate results. Perhaps the most famous statement of this issue is George Akerlof’s famous paper, Lemon Market. For a quick review, this paper examines the used car market. There is equal information between potential buyers and sellers of used cars. When I sell my used car, I know more about the condition of that car than you, the potential buyer. Naturally you might suspect that my car is a lemon – that is, a car with significant problems. The risk that I might try to sell you a lemon will often make you push for a lower price. This, in turn, can lead to the wrong choice problem. When used car buyers seek to lower prices to reduce the risk of a lemon, would-be dealers with high quality used cars will pull them off the market. This makes the used car market more concentrated in lemons, which in turn reduces the number of people willing to give it up, leading those with high quality cars left to exit the market, and so on. Repeat enough of this process, and the used car market will consist of nothing but expensive junk. Still the argument goes.
There is also an asymmetric problem with insurance markets. I know more about my life, health, and habits than the insurance companies. Of course, they can try to use broad statistical measures to account for this. For example, auto insurance companies know that young men are more dangerous to insure than middle-aged women, and they will often charge higher rates to the former than the latter. But this does not completely solve the problem – car insurance policies are issued individually. Maybe I’m a reckless driver, and the fact that I haven’t had any accidents lately makes me very lucky. This is something I don’t know about myself, but the car insurance company doesn’t – there is asymmetric information here. But, like most things in life, it turns out there’s an app for that.
I get my auto insurance through my bank, USAA. And I found out a few months ago that there is an app called USAA SafePilot that you can use to influence your auto insurance rates. When you download the app and sign up for the program, the auto insurance company can get more information about your driving habits. So USAA can get a sense of how I drive, how often I step on the brakes, whether I turn on and use my phone while driving, and more. Also, due to reducing the information asymmetry between me and USAA, my auto insurance rates were reduced by 18%. Not bad at all.
In fact, just knowing that I have this app downloaded on my phone itself motivates me to act differently when I’m driving. One day on my way home in the morning from the gym and I stopped at a red light, I noticed that there was an amazing sunrise going on. I was tempted to pull out my phone and take a picture of it – but then I realized that if I did, the app would tell me to turn on and use my phone while driving, so I kept my phone away.
The general lesson is that the market itself has a tendency to find ways to deal with market imperfections. There is a lack of information between me and the life insurance company – but that can be accounted for by the requirement that the approval of a given life insurance policy requires a medical examination for the insurance company to review. The prospect of a lemon market creates an opportunity for companies like Carfax to emerge to help reduce information asymmetries about used cars. And the advent of new technologies like smartphones can reduce information asymmetries in the auto insurance market in ways that weren’t available a long time ago.
As Arnold Kling would say – markets fail, use markets. Where you see a market failure, another entrepreneur out there sees a market opportunity. The more competition and innovation are used to exploit those opportunities, the better. And as the pace of technological innovation increases, the half-life of market imperfections correspondingly decreases.
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