Asymmetric information and the political market

Abstract
This paper briefly analyses the lack of information on the political market and its
consequences, namely the phenomenon of adverse selection and moral hazard as failures of this
particular market. The citizens are screening the challengers and controlling the incumbents, and the
politicians are signaling in order to gain as many votes as possible. Transparency is very important;
this is the main way and the solution for the electors to get more information, because collective
political decisions recall information to be more efficient.

Key-words: asymmetric information, political market, screening, signaling, controlling

politicians, transparency

REL: 5J
JEL: A12, G14

The political market is characterized by an increased information asymmetry

between the government and the governed, between the candidates for political
positions and the voters. This leads to a series of failures of this particular market,
because, as Joseph Stiglitz shows, decisions must be based on information 1, and the
policy is no exception. Both collective decisions, as well as individual decisions need
information to lead to effective results.
Anticipating a bit, we question whether the political market in Romania is not
in a position to pay what George Akerlof called "the costs of lack of honesty" 2: "The
presence of people who want to offer inferior goods on the market has the tendency to
disestablish the market itself". Of course, under democratic conditions political
market can not be disbanded, but it may occur a phenomenon of "sending off" honest
politicians by those less honest, with lower quality of the applied policies and drastic
reduction of public confidence in the political class. Paraphrasing Akerlof, the cost of
lack of honesty is not only to the extent to which the voter is cheated, but also the loss
that accompanies the withdrawal of honest politicians from the policy.
What did Akerlof mean? On the second-hand cars market, which became
famous as a result of his studies, information asymmetry between the buyer and the
seller makes poor quality cars ("lemons", as Americans call them) to chase away the
good cars from the market. The fact that there is a large probability that a second-hand
car to be qualitatively poor makes the selling price quite small on the market, and
consequently the higher quality second-hand cars are removed from the market - their
owners are not willing to sell them at a lower, inappropriate price.
How is this situation reflected on the political market?
The citizens have learned from his experience that they must not put a high price on
the promises made in electoral campaigns. This is why the electoral programs of the
honest politicians are not believed either. The voters, generally speaking, have a
moderate or rather reduced confidence in all politicians.

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 This can generate a series of consequences:
• Those who would like to get involved in politics with the purpose to
change things for the benefit of the citizens are reluctant to do so.
• A lot of citizens do not vote because the lack of confidence in the electoral
process lowers their interest in the elections. A derivative form of electoral
protest, with a fairly strong support in Western democracies, is “the white
vote”, called civic absenteeism (the voter leaves unmarked the ballot
paper, leading to its cancellation).
• Those who really want to do something in the public interest do not gain
the votes of the public (they do not have sufficient funds for convincing
campaigns), but those who are persuasive enough or manage to buy votes.
The removal from the political arena of those people who would like
something more than power and money for themselves, people unrewarded according
to their intentions and real qualities, but rather ignored, have consequences easy to
predict. This is a phenomenon of adverse selection, a failure of the political market, a
direct consequence of the informational asymmetry between the voters and the
candidates to the political office.
The lack of honesty in business, Akerlof says, is a serious problem in
underdeveloped countries. The dishonest actions of the politicians are also serious,
meaning corruption but also electoral promises void of content.
In the political processes principal-agent relations develop. The citizens
represent “the principal” and the elected politicians and the bureaucrats are “the
agents”, hired by “the principal” to work for his benefit. The principal-agent model
assumes that there is a conflict of interests between the two sides, between the citizens
and the elected politicians, a vision that corresponds to the Public choice 3 opinions on
the political market. The problem is ultimately extremely complex, because the
electorate is not homogeneous, different voters having different preferences 4.
Through the election a deal is made, a “contract” between voters and the
elected politician; according to this contract, the citizen gives his vote to the politician
in exchange of the latter’s electoral promises. Once the electoral process is ended, the
politician feels "insured" against dismissal for a period of time equal to the electoral
cycle, and the citizens encounter extreme difficulties in keeping a check on him and
also have no means to dismiss him immediately if the received utility does not meet
the expectations. This kind of “insurance” makes the elected politician less concerned
about achieving the principal’s goals that he should work for; his central purpose is
pursuing his own interest. This is another kind of failure of the political market - a
moral hazard type of behavior.
It can be noticed that the allegations of the Public choice scholars on the
elected politicians pursuing their own interest according to the homo oeconomicus
model are proved out. Certainly, the approaches are different; the information
economy considers this kind of behavior as a moral hazard, a market failure, while in
the view of the Public choice theory the explanation lies in the economic rationality of
the man who has the political power and acts for his personal benefit. The conclusions
are ultimately convergent.
In pursuing his own goals and ignoring those of the electorate, the politician
can undertake illegal, corrupted actions, including political clientelism, encouraging
rent-seeking practices etc., which also represent failures of the political market.
Generally speaking, people in official positions still have in mind the prospect
of the next elections; these perspectives represent a brake to the actions of moral
hazard.

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 Still, where can the information be obtained from?
According to the economic theory, generically called "classical", the bearer of
the information on the business market is the price, as a measure of scarcity and the
basis of making the production and consumption decisions. In the theory of the
economy with imperfect information the information is obtained by observing the
behavior of individual market players. The problem is that individuals are aware of
this and change their behavior for purposely transmitting false information 5, for their
benefit, hiding the real ones.
If the first step is made by the individual who holds more information in order
to inform the other one, he has a signaling behavior - emits signals bearing
information of interest to less informed individuals. Signaling behavior can also be
denatured. The campaign conducted with an unsincere signaling purpose may thus
become a farce.
Actually, the politicians find out the electorate’s wishes by the agency of the
polls. For example, if the expressed options of the citizens rather lean to the right,
they will adapt their doctrinal position in this regard. Through surveys information
regarding the options of the electorate in several areas of interest is gathered. Usually
the electoral supply of a party / candidate is what in marketing, but also in Public
choice theory is called "bundle"; by bundling a whole package of policies are offered
to the electorate, especially when the vote is for the party lists, not the people are
voted, but the packages of policies that politicians present as the party’s programme.
On the other hand, the voter is in a position to do a screening. But how is he
going to identify the politician that would best respond to his wishes? Unfortunately,
the candidate running for the political position knows from the start what the voter
wants: "to live well", so he often transmits redundant signals in order to persuade the
citizen that he, the politician, is the most able to fulfill the man’s wishes, that he is the
one, best suited for the position for which he applies.
The membership of a candidate to a political party gives him, especially when
he is not known by the public, a certain quality in the eyes of the followers of that
party. If a politician is enrolled in a certain party and the voter has confidence in that
party, even if that confidence is rather emotional and not based on concrete issues, the
situation resembles the confidence in a preferred brand. For some voters this
information is sufficient. In fact, sometimes it is difficult to know more about the
candidate as a person and it would be very difficult and costly for the voters to make
investigations in this regard. The problem is that such a membership of the elected
politician does not provide the voters with compensations if the quality is proven
defective.
We may add that political parties do some screenings themselves, using their
own criteria for promoting politicians on the hierarchical scale or in certain positions.
It should be noted that this type of screening is much stronger in countries with a
single party, as our country was until 1989.
Once elected and invested in office, politicians should be monitored by the
public, but especially by the competent authorities, that struggle against corruption on
behalf of citizens. In addition to the criminal liability the politicians who break the
law in order to gain some personal advantages must be subjected to, they are also
exposed to risk of no longer being voted at the next elections. Uninominal vote should
be a suitable tool for this type of reward / punishment.
Assuming that voters vote retrospectively, the electoral process is a means of
screening through which, the voters, unfortunately, do not have complete control over

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the politicians. The political market is sorting in this way and in time is eliminating
those politicians who seek their own interests to the detriment of the electorate 6.
The control over the politicians, however, can mean more than the
retrospective vote, more than just a selfish vote. It may be a sociotropic 7 vote; it
means that the voter takes into account the national economic conditions in general,
when voting. The voter "awards or punishes" the politician having in mind the entire
economy, not necessarily because he thinks of the good of the country, but because it
is better for him too to be part of a prosperous nation 8.
In some situations the politicians are still not influenced by the prospect of the
next elections, for example if the number of seats is limited by the law, or if they are
simply sure they won’t be elected anymore.
On the other hand, there are providential people who work from conviction for
the good of the collectivity. People are still waiting for them; they continue to hope,
even if they are discontent and say they do not trust the political class anymore.

In fact, why is it important to study information asymmetry on the political

market?
It is important because the voters must understand that they need information
in order to distinguish between real promises that can be materialized after the
elections, and fake promises, made just to get some votes in return. They must be
informed and educated to properly receive the messages sent by the political
marketing and to be able "separate the wheat from the chaff”.
To this end, they should ask, through public opinion and civil societies, as
much transparency in the politico-administrative processes as possible. They must
denounce lack of transparency; they should even create a possibility to immediately
sanction such practices, not just once every four years.
I keep in mind a statement made by an acquaintance of mine, resident in
Austria, in the 90s, explaining what democracy means: "Here, in Austria, there are
high taxes, but I know exactly how the money the state takes from me is used.” He
was receiving, as a citizen, periodic information on the use of taxes that he paid and,
what is very important, he wanted to be informed, he was concerned that he must be
informed.
Transparency is necessary in politics, people need as much information about
the activity of the officials, even if some politicians claim that it would have adverse
effects on the quality of governance, because in this way we know to what extent the
interests of citizens are taken into account or if the private interests of the delegates
come first, on behalf of the people. Lack of transparency fosters corruption, and it is
unquestionably "sand in the wheel of economic growth."
We should also mention that individuals tend not to make particular efforts to
obtain information on the political market. They do not feel that the benefits they
would get if they voted consciously would compensate the costs of obtaining the
information in terms of scarcity. They do not feel directly and immediately affected,
as individuals, by the outcome of the elections, not to the same extent as they are
directly and immediately affected by the choices that they make on the market of
goods and services. On the other hand, they have the impression that their vote will
not influence the final outcome, but that it is lost without trace in “the sea of votes”. In
fact, according to Downs’s paradox of voting, even the cost of voting itself exceeds
the benefits of voting. Consequently, they allow the information to reach them in one
form or another, if the information succeeds in getting through the informational
noise. The problem is that most often little, distorted, false information gets to the

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voters, sometimes aimed to manipulate 9 them. Under these circumstances it is even
more necessary for citizens to become aware of the necessity to be informed.
For, as George J. Stigler says, "everyone knows: knowledge is power" 10.
That’s why it is important to study informational asymmetry on the political
market.

1
Joseph E. Stiglitz, „Information and the Change in the Paradigm in Economics”, American Economic
Review, Vol. 92, No. 3, (June, 2002), pp. 460-501
2
George A. Akerlof, „The Market for „Lemons”: Quality Uncertainty and the Market Mechanism”,
The Quarterly Journal of Economics, Vol. 84, No. 3 (Aug., 1970), pp. 488-500
3
James M. Buchanan, Gordon Tullock, Calculul consensului. Bazele logice ale democraţiei
constituţionale, Versiunea în limba română Dr. Paul Fudulu, Editura Expert, Bucureşti, 1995
4
John Ferejohn, “Incumbent preference and electoral control”, Public Choice 50: 5-25 (1986)
5
Joseph E. Stiglitz, „Information and the Change in the Paradigm in Economics”, American Economic
Review, Vol. 92, No. 3, (June, 2002), pp. 460-501
6
John R. Lott, Jr., W. Robert Reed, „Shirking and sorting in a political market with finite-lived
politicians”, Public Choice 61: 75-96 (1989)
7
John Ferejohn, “Incumbent preference and electoral control”, Public Choice 50: 5-25 (1986)
8
Marcus A. G. Harper, „Economic Voting in Post-Communist Eastern Europe”, Center for the Study
of Democracy, UC Irvine, http://www.democ.uci.edu/publications/papersseriespre2001/harper.htm,
accessed 16.12.2008
9
Simona Buşoi, „Comunicarea politică, fenomen cotidian”, Simpozionul internaţional “Comunicare,
competenţă şi competitivitate”, 24 noiembrie 2007, Academia de Studii Economice din Bucureşti,
Facultatea de Economie, Catedra de Comunicare şi politici economice
10
George J. Stigler, „The Economics of Information”, The Journal of Political Economy, Vol. LXIX,
June 1961, No. 3

References

1. Akerlof, George A., „The Market for „Lemons”: Quality Uncertainty and the
Market Mechanism”, The Quarterly Journal of Economics, Vol. 84, No. 3 (Aug.,
1970), pp. 488-500
2. Buchanan, James M.; Tullock, Gordon, Calculul consensului. Bazele logice ale
democraţiei constituţionale, Versiunea în limba română Dr. Paul Fudulu, Editura
Expert, Bucureşti, 1995
3. Buşoi, Simona, „Comunicarea politică, fenomen cotidian”, Simpozionul
internaţional “Comunicare, competenţă şi competitivitate”, 24 noiembrie 2007,
Academia de Studii Economice din Bucureşti, Facultatea de Economie, Catedra de
Comunicare şi politici economice
4. Ferejohn, John, “Incumbent preference and electoral control”, Public Choice 50:
5-25 (1986)
5. Harper, Marcus A. G., „Economic Voting in Post-Communist Eastern Europe”,
Center for the Study of Democracy, UC Irvine,
http://www.democ.uci.edu/publications/papersseriespre2001/harper.htm,
accessed16.12.2008
6. Lott, John R. Jr.; Reed, W. Robert, „Shirking and sorting in a political market
with finite-lived politicians”, Public Choice 61: 75-96 (1989)

5
7. Popescu, Constantin, Creşterea care sărăceşte, Editura Tribuna economică,
Bucureşti, 2003
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87, No. 3, 1973, pp. 355-374
9. Stigler, George J., „The Economics of Information”, The Journal of Political
Economy, Vol. LXIX, June 1961, No. 3
10. Stiglitz, Joseph E., „Information and the Change in the Paradigm in Economics”,
American Economic Review, Vol. 92, No. 3, (June, 2002), pp. 460-501
11. Taşnadi, Alexandru (coordonator), Şcoala din Virginia. James McGill Buchanan
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