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February 01, 2010

Crowd-sourcing combats information asymmetry

Jonathan Zinman and Eric Zitzewitz studied ski resorts claims about snowfall. They found that, relative to government snow reports, ski resorts claim 23% more snowfall for weekend days than for weekdays. Seems a pretty clear case of deceptive advertising to draw in the business, with the risk (of being sued for deception, or of damaging reputation) taken more when the payoff is higher (weekends).

Deceptive advertising is a standard case of asymmetric information, hidden characteristics variety. The resort has better information, and chooses what to report.

What incentives to induce honesty? As I mentioned above, there are at least two obvious incentives: avoiding a lawsuit (by a government agency or perhaps a class action on behalf of disgruntled customers), and avoiding a loss of customer goodwill if they realize the resort is routinely lying.

How to increase those incentives (since apparently they have not been enough to prevent at least some deception)? One way is to raise the fine or other penalties if prosecuted. Another way, particularly for the reputation effect, is to reduce the cost of getting better information to the consumers.

And...Zinman and Zitzewitz found that the deception has decreased since the release of an iPhone app that aggregates skier reports of local conditions in real time (and that the reduction in exaggeration is much more notable at resorts that have good iPhone reception).

Crowdsourcing: reducing asymmetric information problems.

(Zinman must be pretty happy to have found a co-author with whom he gets first billing in co-authored papers...no mean feat.)

(Via Erin Krupka and the Marginal Revolution blog.)

Posted by jmm at February 1, 2010 11:50 AM

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