The core of economics is the study of human behavior and the allocation of available resources to meet their human wants which invariably involves choice and selection because these wants, needs demands, are too numerous to have all of them at the same time.

1. • Economics of Information
Project
Name
• Pallab Das
Student Name
• Master of Library and Informtion science in
Digital Library
Subject
Jadavpur University

2. Introduction
The core of economics is the study of human
behavior and the allocation of available
resources to meet their human wants which
invariably involves choice and selection
because these wants, needs demands, are too
numerous to have all of them at the same time.

3. Why is Economics of Information an important topic
of Information science?
• Medical services: A doctor knows more about
medical services than does the patient.
• Insurance: An insurance buyer knows more
about his riskiness than does the insurance
company.
• Used cars: The owner of a used car knows
more about it than does a potential buyer.

4. Contd..
• Markets in which one or both sides are
imperfectly informed are markets with
imperfect information.
• Imperfectly informed markets in which with
one side is better informed than the other are
markets with Asymmetric Information (AI).

5. Classification of Economy
• Free Market Economy
• Planned Economy
• Mixed Economy

6. Free Market Economy
• The market conditions will determine most of
the economic activities, like
• DEMAND AND SUPPLY,
• PRODUCTION OF GOODS AND SERVICES, AND
DISTRIBUTION,
• COST AND PRICE, etc.
• The actors could be Business People and
others of various potentialities.

7. Planned Economy
• The resources are allocated usually by a
centralized commissioned body of the
government of a country with experts drawn
from different specialties.

8. Mixed Economy
• The resources are owned partly by
private groups and by government.

9. Information Asymmetry Theory
• Information asymmetry deals with the study of
Decisions in transactions .
• In this case one party has more or better
information than the other.
• This asymmetry creates an imbalance of power
in transactions, which can sometimes cause the
transactions to go away, a kind of market failure
in the worst case.
• Information asymmetry is in contrast to perfect
information.

10. "Analyses Of Markets With Asymmetric
Information“ (2001) Nobel Memorial Prize in Economics
Joseph Stiglitz Michael Spence
George Akerlof

11. Information Asymmetry Theory has three components

12. Adverse Selection
• The classic paper on adverse selection is
George Akerlof’s "The Market For Lemons"
from 1970, which brought informational
issues to the forefront of economic theory.
• It discusses two primary solutions to this
problem, signaling and screening.

13. Signaling
• Proposed by Michael Spence
• it is possible for people to signal their type,
thus believably transferring information
to the other party and resolving the
asymmetry.
• Studied in the context of matching in the job
market.

14. Screening
• Joseph E. Stiglitz pioneered the theory
of screening.
• In this way the under informed (not fully informed) party
can induce the other party to reveal their information.

15. Cont’d…
• Situations where the seller usually has better
information than the buyers.
Eg. Stockbrokers and real estate agents.
• situations where the buyer usually has better
information than the seller include
Eg. Royal estate sales .

16. Uncertainty and Information
• Uncertainty is the unavoidable truth of human
life, nobody can perfectly predict the actual future
• The phenomenon is very much present in
Economics, as all investments are risk prone and need
an insurance coverage for sustaining losses.
• this type of uncertainty is reduced to a certain
measure by the availability of timely information.

17. IA : Types
Information
Asymmetry is
present between
buyer and seller
This kind of
Asymmetry
Information
can create
market failure.
There are three
basic types of IA is
present:
Moral
hazard Adverse
selection
Signalling
They differ according to the timing in which the IA takes
places

18. Types of information asymmetry
Moral hazard
Information is
symmetric
before the
contract is
accepted but
asymmetric
afterwards
Two cases of moral
hazard:
The agent will carry out a non
verifiable action after the signature
of the contract (hidden action)
The agent knows the same as the
principal before the contract is
signed, but it will know more than
the principal about an important
variable once the contract is
accepted (ex post hidden
information)

19. Types of information asymmetry
Examples of Moral Hazard
•Effort to diagnose an illness
(hidden action)
•Specially seen in insurance
market.

20. Adverse selection
 Adverse selection is sometimes called hiddeninformation.
 The pure case of Adverse Selection assumes that any action
taken by the agent after the contract is accepted can be
verified (effort is verifiable).
 Potentially, there are many types of agents (high ability
salesman, low ability salesman), and the principal does not
know the type his agent .
 In other words, the agent can lie to the principal about his
type without being punished.

21. Examples of Adverse Selection
• Medical insurance: healthy and
unhealthy customers (even if there are
tests, they might be too costly)
• Highly motivated or low motivated
worker
• Drivers that enjoy speed and drivers
that dislike speed

22. Signalling
It is like Adverse Selection (there is IA before the signature of the
contract)
Either the Principal or the Agent can send a signal
to the other that reveals the private information.
Of course, the signal has to be credible

23. Example of Signalling
A University degree reveals that a potentially
employee is smart enough.

24. Consumer
products,
Insurance,
Jobs
Financial markets.
Role of Information in various Markets

25. Consumer products
• Buyers (household) are typically less informed
than the sellers about aspects of product
quality such as ,
Eg. -
• Risks or malfunction,
• Leakage and decomposition.

26. Insurance Market
• When an individual has chosen to buy insurance
of any kind, they have the option to either make
an effort to avoid having to make a claim or to
not make an effort in avoiding making a claim.
• If they choose to make an effort (e),
• then the probability of that consumer making a
claim is p=p(e).
If not then
• individual making a claim increases to p=p(ne)

27. Job Market
• In job markets, there are problems of
information that have a special importance.
• Searching, signaling and screening are activities affecting the
supply and demand for workers, the dispersion of wage rates,
and the rate of employment, working age, and such others.
• The employees and job seekers resort to different methods
of informing themselves of the opportunities and markets to
meet their particular requirements.

28. Finance Markets
• Imperfect knowledge, risk and uncertainty
plays different roles, particularly in different
credit and capital markets.
• In all these markets, the Internet with its
global spanning technology offers
today,remarkable E-Commerce (E-Business)
facilities for exchange of information, goods,
and payments with speed and efficiency
irrespective of location

29. Roll of price for information
• Economists recognize that price plays a role in
addition to generating money.
• Price also carry information and give
incentives and
• Money give potential users signals about the
relative social costs of library service versus
other methods of getting information and
recreation.

30. Information as Commodity
Product
Market
Consumption
Public Good

31. Producing information
• The trouble is that , in our economic system
we produce a product so long as there is a
demand.
• In case of information too, one may stop
creating new ideas, or new information if he is
not going to get profit out of it.

32. Cost Effectiveness and Cost Benefit
• Efficiency , effectiveness and
benefit are the three important
things we have to consider in
the context of economics of
information.

33. Cost vs Price
• cost and price are used interchangeably.
• In a ‘for-profit’ situation, the price
presumably, will be higher than the cost.
• In another kind of situation, it can be lower
than the cost.

34. The Cost and Benefit of Digital
Information
• Digital information has increased benefits over
print and provides information consumers
with these benefits at a lower cost.
• The benefits of digital information include the
ability to search more effectively than print.
keyword searching on CD is more efficient
than the previous subject indexes in card
catalogs or other print indexes

35. Cost of Access to Information
Producers Intermediaries Consumers.
Stakeholders of Information

36. Indian Economy and Information
• developing new strengths to become a strong
regional economic power in the new
millennium.
• This transformation has begun from 1991
from a highly regulated and inward-oriented
to an outward

37. Constraints towards progress
universal
literacy
corruption
at all levels
Poverty
standard of
living

38. Digital initiatives taken
• There are also indications that Indian business to
compete with world markets, are trying to invest
in knowledge management.
. Infosys, TVS, Dr. Reddy’s Pharmaceutical Labs.,
Samtel (manufacturing TV picture tubes)are a few
industrial enterprises that are looking towards
knowledge management for innovations and
creating new knowledge to compete in global
markets.

39. Conclusion
• This account shows that how economics has a great effect on
information. On the other hand it can also be say that
information also has a great impact on economics.
• The arrival of CD-ROM in the 1980s paved the way for the
mastering of large databases and their distribution
worldwide on stand-alone computers. The Internet and the
Web technologies and all other supporting technologies
have strengthened the accessibility to worldwide
information.
• It also has a great impact on the economy of information and hence the
information technology is developing , it could be presumed that it will give a
good impact on the economy in future.