Abstract
The chapter develops a hypothesis to account for the easily observed fact that the shrouding of information – such as the concealment, distortion, and falsification of information – is a feature of the supply side of both the private and public sectors.
Consumers and citizens need information to make decisions. In some circumstances, suppliers – business enterprises and public sector actors – can raise the cost of searching for the information required by demanders to choose efficient courses of action by shrouding information. When engaging in activities that make searching less attractive to citizens is expected to be profitable, suppliers will contemplate undertaking information shrouding.
Assuming that the net benefits to private and public suppliers are positive, these suppliers will shroud information only if by so doing they can also segment market participants and citizens into clusters, with the members of at least one of these clusters having demand curves for the good and/or service suppliers are offering that, in the relevant range, has a price elasticity that is greater than one. Sometimes and for some goods and/or services, the emergence of exploitable clusters appears to be almost spontaneous; at other times and for other goods and/or services, the emergence of exploitable clusters requires the investment of resources by suppliers.
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Notes
- 1.
Nelson calls them goods that possess “search qualities” – or search goods. I use Stigler’s (1987, 244) nomenclature for the Nelson goods.
- 2.
Nelson’s initial results have been formalized, expanded, and reinforced by Milgrom and Roberts (1986).
- 3.
- 4.
The existence of experience and credence goods and services had been recognized by Arrow (1963/1971) in a framework of market failure and of trust and rules as remedies for the failures.
- 5.
I do not address the matter of sufficiency. The two necessary conditions I discuss are, in all likelihood, not sufficient. It is not necessary to insist that little is known about sufficiency in much of economic theory.
- 6.
In Section 3.4, I defend the use of the word ‘clusters’ in the discussion of public sector shrouding. For reasons of symmetry, I use that word throughout.
- 7.
I will use this word to refer to the situation that obtains when the cost of searching for an additional “unit” of information exceeds the benefits that one would derive from that extra unit, such that none more is acquired. The cost may be high because the time, energy, and other resources that would have to be committed to searching is too large or simply because consumers (citizens) are not aware that information is being shrouded and consequently make decisions on false information.
- 8.
For a good discussion of the theory of price discrimination and of its uses, see Phlips (1981).
- 9.
The marginal revenue (MR) of a seller is equal to the price (P) of the product she sells multiplied by (1 + 1/the elasticity of demand) or MR = P (1 + 1/ε ), where ε is the elasticity of demand. If that elasticity is less than one, an increase in price will generate a negative marginal revenue.
- 10.
If there is only one cluster whose members’ demand curve has a price elasticity greater than one, we have monopoly pricing.
- 11.
Shrouding and brainwashing, though they no doubt belong to the same family of activities used to manipulate individuals, are two different phenomena. For a model of brainwashing, see Breton and Dalmazzone (2002, 46–58).
- 12.
Organic salmon is salmon that has not been fed chemical pesticides or fertilizers, hormones and antibiotics.
- 13.
In the wild salmon illustration, shrouding is over the quality of the product as consumers can be assumed to care little about how quality is produced. In the case of some other products – ethical goods are an example – the mode of production is the focus of attention even when quality is invariant among modes. For example, some consumers will refuse to buy goods produced by using child and/or forced labour even if the quality of the product is high. In cases such as ethical goods, shrouding would be over the mode of production. I am grateful to Pierre Salmon for bringing these goods to my attention.
- 14.
The literature – see for example Congleton (1991) and Salmon (2002) – often calls the kind of groupings I have in mind “coalitions,” which gives the impression that the groupings are alliances. The groupings that segmentation begets are seldom, if ever, alliances. For that reason I prefer the word “clusters.”
- 15.
The number of players in the public sector is very large. There are obviously politicians and bureaucrats, but there are also judges, central bankers, military personnel, police officers, and many others. Because none should be excluded from the hypothesis, I use the words “public sector actors” as an all-inclusive expression.
- 16.
Salmon (2002, 72) writes: “… that the main mechanisms which may transform otherwise sensible persons into sincere extremists are those that involve a drastic narrowing of the person’s vision or concern”. Though I am not concerned with extremists and extremism, I feel justified in using the word “monomaniac” in that I provide a “mechanism” which can lead to a “dramatic narrowing” of one or more concerns of one or more persons. Congleton (1991) calls these people “zealots,” a word that does not reflect the sort of people I have in mind.
- 17.
At least as long as the function used to produce monomaniacs is linear homogeneous which seems a not unreasonable assumption.
- 18.
That was the electoral strategy pursued from 1995 to 2002 by the Ontario Progressive Conservative government of Michael Harris. It is also the strategy currently used by the federal Conservative government of Stephen Harper. The non-monomaniacs abandoned by the Harris strategy and by the Harper strategy were and are the populations of Ontario and of Canada’s larger cities.
- 19.
The language I am using in this subsection implies that the Administration had “private information” about the real situation in Iraq before going to war and decided to falsify that information to get the public’s support it felt it needed to go to war. It is virtually impossible to take a different view given the ongoing investigations and reports by the UNMVIC and the IAEA.
- 20.
It is also possible that the existence of public broadcasters in many of these countries means that the “Hug mechanism” (see next footnote) is blunted.
- 21.
I am grateful to Simon Hug, who discussed the paper when it was presented at the Conference, for his analysis of the complex interaction between governmental falsification and the media. The latter serve two markets at the same time: a market of people (usagers in Hug’s analysis) consuming entertainment, news, analyses, letters to editors, etc.; and a market for advertisers. If the government’s falsification is sufficiently powerful and effective in that it shrouds true information almost completely, the media will find themselves obliged to diffuse the falsities in order to sell advertising – their very bread and butter.
- 22.
I am grateful to Simon Hug for pointing to the role of uncertainty in the analysis of shrouding – a reality which was completely absent in the Conference’s version of the paper.
- 23.
On intergovernmental contracts, see Scott (forthcoming).
- 24.
Inman and Rubinfeld (1997, 96–97) call the Breton-Scott organizational costs “transaction costs” and label them: “decision costs,” “monitoring costs,” “revelation costs,” and “moving costs,” a change in nomenclature that they do not defend. In the fifth (1980) and sixth (1987) editions of The Public Finances. An Introductory Textbook, Buchanan and Flowers, in their recommended “Supplementary Readings” at the end of the chapter on federalism, refer students to Breton and Scott (1978) as providing “a modern discussion of the economics of federalism,” which I take as an authoritative endorsement of the robustness of the theory. Musgrave et al. (1987, 506) make use of the Breton-Scott model to offer a “positive theory” of intergovernmental grants, which again I take as an endorsement of the Breton-Scott (1978) model.
- 25.
I note in passing that in my frame of reference, the expression fiscal imbalance is a semantic accident – a cute expression that got attached to what elsewhere in economics we call a disequilibrium!
- 26.
Consumer Reports (2006, 15–17) has also argued that the use of ethanol is, at present, inefficient.
- 27.
In Brazil the quantity of ethanol produced (e) is a function of the prices of crude oil (c) and of sugarcane (s), with ∂e / ∂c > 0 and ∂e / ∂s < 0. Ethanol is, in effect, produced to reduce the country’s dependence on foreign supplies of oil. I am grateful to Mariana Prado for this information.
- 28.
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Acknowledgments
I would like to thank Louis Imbeau, Pierre Salmon, and Anthony Scott for extensive written comments on the paper; comments that have led to more precision and to what I believe is a better product. I also wish to thank Simon Hug and the participants at the Congrès international des associations francophones de science politique (Université Laval, Québec, May 2007) for their verbal comments and questions. The usual caveat applies.
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Breton, A. (2009). Information Shrouding and the Governmental Supply of Goods and Services: An Economic Perspective. In: Imbeau, L. (eds) Do They Walk Like They Talk?. Studies in Public Choice, vol 15. Springer, New York, NY. https://doi.org/10.1007/978-0-387-89672-4_3
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