Balkinization  

Tuesday, January 31, 2006

Less Information, Better Decisions

Ian Ayres

Here’s a Forbes column that Barry Nalebuff and I just published exploring yet another context – executive compensation -- in which keeping decisionmakers in the dark improves their choices.

Rob Gertner and I long ago extolled the virtues of information-forcing rules but it turns out that there are lots of contexts where information-dampening rules or information-screening rules do a better job.

The secret ballot led Bulow and me (and Ackerman and me) to the donation booth.

But mandating ignorance is also behind the idea of blind grading and double-blind experiments and the wonderful Toblin letter.

Even the “you cut, I choose strategy” that underlies break up strategy is an example of information-screening because the cutter doesn’t know which side the chooser will choose.

A really interesting question is whether there is a general theory for when the law should adopt information-forcing, and information-dampening strategies (and when the law should just sit back and let private parties decide whether or not to become informed). I'd love to hear any suggestions from this blog's wise readers . . .

Comments:

The examples of information-forcing rules in this post concern a situation where either a market mechanism fails due to an agency problem (CEO pay; you cut, I choose), or a situation where a market dictated outcome conflicts with our political philosophy (campaign donations vs. the idea that all people should have equal political power no matter their buying power).

So, I tend to see your information-forcing rules as one strategy for dealing with market or political system failures. Then the question becomes when is meddling with a sub-optimal outcome worth the costs and risk of implementing a information forcing reform/law. I think the libertarian/Republican public-choice economists and the more Democratic-liberal economists have been debating that issue for quite a while.
 

The place to information damp is where there is wide concensus on the important elements of the transaction.

Also, while there is a lot of academic literature out there that opposes wage and price fixing, there is very little discussing "structured capitalism" where wages and prices are not fixed, but the bulk of the terms of the deal are. Examples of structured capitalism are very common, for example, federally guaranteed loans generally have floating rates but inflexible terms. Likewise, usually franchise owners can set prices within reason, but not change the product lineup. Public execution sales of real estate would be another example.
 

Interesting comment. Information-forcing rules, btw, are everywhere in law (evidence, criminal law, environmental law). One wonders if the conclusion applies there two. Adversary systems seem to be information-forcing; boilerplate contracts and confidentiality rules are information-dampening. I wonder whether judicial discretion is info-forcing or info-dampening -the factors affecting the outcome are potentially more, but the court might decide to ignore some of them.
 

Wrt to the question asked in the post - it is a complex issue, because a legal rule is an info-dampening strategy in itself: from the universe or relevant info out there,Congress has selected a few relevant facts and linked them with legal outcomes.So regulation might be thought as a response to the power of a party to withhold relevant info. Of course, if we overregulate, this strategy fails (this is essentially Hayek's argument about "competition as a discovery process"). If we use fuzzy terms, this strategy may also fail.But disclosure rules (as, say, in the stockmarket, or consumer protection) may also dampen information which is not required -which may be undesirable (say, in areas where conditions change fast - as in the exersice of emergency or war powers, or new technologies)
 

As we all know, life is always moving on.
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