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A Man's Random Walk

politik, economik, foreign affairs
Permalink : http://blog.nationmultimedia.com/ginola

Monday , November 17 , 2008

Asymmetric Information and Thai Politics (Part 1)

Posted by Ginola , Reader : 661 , 12:03:15

Can the economics of information be useful in explaining political behaviors and outcomes? Let me give it a try by looking specifically at Thai politics. Before we go on to politics, let's first discuss the concept of asymmetric information. Asymmetric information problems fall into two categories: adverse selection and moral hazard. My previous blog on the market for lemons is related to adverse selection, a situation in which there is quality uncertainty as a result of the fact that one side of the market has less information than the other. For example, consider a market for health insurance. People who are most likely to buy insurances are those who think they have bad health conditions. Healthy people naturally are less likely to buy insurances. The problem that the seller of health insurance faces is that the company doesn't know for sure whether a customer is a healthy or unhealthy one. Because of this imperfect information, the company may end up with mostly the unhealthy customers (the "lemons") and as a result may suffer losses and go out of business. This is a case which economists term a "market failure" - a market, when left alone, fails to operate efficiently because of asymmetric information. ......... Now, let's apply the adverse selection notion to democratic politics. To set stage, think of politics as a market for policies (this way of thinking is borrowed from Professor Rangsan Thanapornpan's work). The sellers of policies are politicians, who try to sell themselves as good politicians who will deliver good policies to the voters in return for their votes. The buyers of policies are citizens who elect the politicians. Of course, the citizen wants to have a politician who is honest and can deliver good policies that would benefit the citizen. Indeed, this is a simplification of the real world in which people vote based not only on policies but also other factors such as personality of the candidate, personal relationship with the candidate, and other characteristics of the candidate like gender, race. But for the moment let's ignore these traits. After all, one can quite strongly argue that what the citizen ultimately cares about is the benefits she gets from good policies. One information-related problem in this market for policies is adverse selection. Because being a Member of Parliament can give one certain power, influence as well as private benefits, there are some candidates who want to get elected simply because of their own private, not public, interests. They want to be in office to engage in corrupt practices for private gains. In an ideal world with perfect information, people would know for sure who is honest and who is not, and they can vote accordingly. Unfortunately, in the real world, citizens are much less informed about the quality or characteristics of a particular politician than the politician himself. The citizen doesn't know whether a particular candidate is an honest person who cares about the public or a corrupt one who just wants to use the office for private gains. What this imperfect information implies is that there is a natural tendency for citizens to treat the politician as an "average" one (hence the common saying in Thailand that "all politicians are the same - they are all corrupt"). This also means that honest, publicly minded candidates are likely to feel discouraged to run for office because they have to compete with the dishonest candidates on the ground that most voters don't know who are the honest ones. In other words, their "honesty" and "good intention for the country" cannot be fully appreciated and is not fully rewarded by voters because of asymmetric information. Thus, information asymmetry regarding the quality of politicians can give rise to adverse selection problems and the market for policies can as a result be flooded with dishonest and corrupt politicians. The "lemon" politicians are driving the good ones out of the market. In the next blog, I will look at another type of asymmetric information problem - moral hazard - and apply it to Thai politics. Then I will use both adverse selection and moral hazard to explain practices such as vote-buying, and finish up by suggesting some policy implications to alleviate these imperfect information problems. (also posted on my blog at http://lemonsmarket.blogspot.com/)

Can the economics of information be useful in explaining political behaviors and outcomes? Let me give it a try by looking specifically at Thai politics.

Before we go on to politics, let's first discuss the concept of asymmetric information.

Asymmetric information problems fall into two categories: adverse selection and moral hazard. My previous blog on the market for lemons is related to adverse selection, a situation in which there is quality uncertainty as a result of the fact that one side of the market has less information than the other.

For example, consider a market for health insurance. People who are most likely to buy insurances are those who think they have bad health conditions. Healthy people naturally are less likely to buy insurances.

The problem that the seller of health insurance faces is that the company doesn't know for sure whether a customer is a healthy or unhealthy one. Because of this imperfect information, the company may end up with mostly the unhealthy customers (the "lemons") and as a result may suffer losses and go out of business.

This is a case which economists term a "market failure" - a market, when left alone, fails to operate efficiently because of asymmetric information.

.........

Now, let's apply the adverse selection notion to democratic politics.

To set stage, think of politics as a market for policies (this way of thinking is borrowed from Professor Rangsan Thanapornpan's work). The sellers of policies are politicians, who try to sell themselves as good politicians who will deliver good policies to the voters in return for their votes.

The buyers of policies are citizens who elect the politicians. Of course, the citizen wants to have a politician who is honest and can deliver good policies that would benefit the citizen.

Indeed, this is a simplification of the real world in which people vote based not only on policies but also other factors such as personality of the candidate, personal relationship with the candidate, and other characteristics of the candidate like gender, race. But for the moment let's ignore these traits. After all, one can quite strongly argue that what the citizen ultimately cares about is the benefits she gets from good policies.

One information-related problem in this market for policies is adverse selection. Because being a Member of Parliament can give one certain power, influence as well as private benefits, there are some candidates who want to get elected simply because of their own private, not public, interests. They want to be in office to engage in corrupt practices for private gains.

In an ideal world with perfect information, people would know for sure who is honest and who is not, and they can vote accordingly. Unfortunately, in the real world, citizens are much less informed about the quality or characteristics of a particular politician than the politician himself. The citizen doesn't know whether a particular candidate is an honest person who cares about the public or a corrupt one who just wants to use the office for private gains.

What this imperfect information implies is that there is a natural tendency for citizens to treat the politician as an "average" one (hence the common saying in Thailand that "all politicians are the same - they are all corrupt").

This also means that honest, publicly minded candidates are likely to feel discouraged to run for office because they have to compete with the dishonest candidates on the ground that most voters don't know who are the honest ones. In other words, their "honesty" and "good intention for the country" cannot be fully appreciated and is not fully rewarded by voters because of asymmetric information.

Thus, information asymmetry regarding the quality of politicians can give rise to adverse selection problems and the market for policies can as a result be flooded with dishonest and corrupt politicians. The "lemon" politicians are driving the good ones out of the market.

In the next blog, I will look at another type of asymmetric information problem - moral hazard - and apply it to Thai politics. Then I will use both adverse selection and moral hazard to explain practices such as vote-buying, and finish up by suggesting some policy implications to alleviate these imperfect information problems.

(also posted on my blog at http://lemonsmarket.blogspot.com/)

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comment 8
FelixQui date : 18/11/2008 time : 11.41
http://blog.nationmultimedia.com/FelixQui

I stole a couplet,
Nature and nature's laws lay all in Light
dixitque Deus fiat nox et facta est nox

(Apologies to Pope and god)

comment 7
wch date : 18/11/2008 time : 09.55

I coined a phase, Un-Questioned Answer.

PAD came out in 2005 and demanded Thaksin to resign for his law manipulation to enrichen his business and unacceptable populistic management.
Many worried his samaritan-like cash distribution to the rural populace to consolidate his power base, an immitation of latin American politic engineering in Venezuela and Bolivia.

Thaksin dissolved the parliament instead and
invested a form of, DEMOCRACY in his own version.

This bad first botton in wrong hole have been developing into full blown struggle of today and,

They are confused why they are in the struggle so,
'Let's compromise ', they say but they dont know,
"What to be compromised ?"

comment 6
FelixQui date : 17/11/2008 time : 22.53
http://blog.nationmultimedia.com/FelixQui

Ginola,
I agree completely with your concise comments on the assorted Thai constitutions to date. Maybe one day ...

comment 5
Ginola date : 17/11/2008 time : 22.14
http://blog.nationmultimedia.com/ginola
ginola

rad, thanks. I just came up with this idea of applying asymmetric information to Thai politics a few days ago, I googled to find out if anyone has thought of this before and I couldn't really find it. So it's been fascinating for me to try to see if infor asymmetry can help explain Thai political problems in some ways.

Ian, haha that's definitely right.

Felix, thanks for the comment. Just a quick word on constitution though - I think Thai constitution, unlike that of the US or the UK, is NOT a strong institution. It is merely a reflection, a product, of the balance of power in Thai politics at a certain time period. Like, you can learn a lot of stories/developments Thai politics by just following the various (19?) constitutions that we have had so far. The constitution here doesn't seem to be the great law of the land, or the shared value of the citizens.

As for promoting my other blog, I don't see it as "competing". The two blogs are not perfect substitutes because there will be things that I write over there which will not be appropriate for this nation blog. It is, after all, up to the readers to choose which to read. By putting the link here, I merely make information a little less imperfect

Aussie, great question. I will think about it definitely. For now let me complete my part 2 first and I'll address your question.

comment 4
AussieObserver date : 17/11/2008 time : 18.16
http://blog.nationmultimedia.com/politics

hope you dont mind if I leap ahead and ask a question....

do you think the risks of poor judgements due to asymmetric information will be greater in a one-person one-vote election of MPs or selection of MPs by a remote group of indirectly chosen experts?

perhaps the question before this should be:

in which scenario will there be a chance of making a judgement at all?

comment 3
FelixQui date : 17/11/2008 time : 17.40
http://blog.nationmultimedia.com/FelixQui

I'm also looking forward to the next instalment.
I think any decent solution would require some radical revision of sensitive bits of the motley Thai constitution.
___________

In the meantime, I'm glad to see you have followed the Nation staff's example and started promoting your other Blog on a competing Blog site.

comment 2
Ian date : 17/11/2008 time : 13.51
http://blog.nationmultimedia.com/anterian36

Asymetric information is a common problem in many activities, for example boy meets girl relationships

comment 1
rad date : 17/11/2008 time : 12.50
http://blog.nationmultimedia.com/rad

Ginola,
Very interesting and await the next edition

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