Since the seminal contributions of Akerlof, the pervasive effects of information asymmetry in markets have been studied in numerous contexts. The general idea is as follows: if a market involves sellers and buyers and one party has more or better information than the other, there could be an imbalance of power, resulting in a market failure. This is so called a “lemons market” as we have discussed in class. This idea assumes that well functioning markets move us closer to better social outcome such as efficient allocations of resources. In other words, an efficient allocation results if a market involves full information.

           Economists in general, however, also believe that they can prevent a market failure in a market with information asymmetries; their big emphasis is on the use of the formal enforcement. As we’ve learned from doing the problem set 6, a government tax can somewhat prevent a market failure. Moreover, with the use of formal contracts, the commitment of a seller becomes credible and the information gains value.

           This is the general idea we’ve learned in class. On the other hand, an article released last Sunday, Information and Illegal Market Mechanism, interestingly suggests that formal enforcement may not necessarily be needed to prevent a market failure. In order to show that “bad” social infrastructure can actually result in a well functioning market, the author uses an example of an illegal market: the online market for male sex work.

            One cause of a market failure is an unreasonable price range that does not reflect the real quality of a product. Since the market for male sex work is an illegal market and therefore has no formal institutional penalties, one might think male escorts would post unreliable information about themselves and engage in fraud. Furthermore, since their information contain little value, clients would not believe the way escorts are represented online and the prices asked. However, the author claims that his studies actually have shown the opposite. Although there wasn’t a legal enforcement, clients themselves policed escorts through the independent client-owned forums and through the review of the services on the website. In other words, even without formal enforcement, the clients had found ways of identifying the sellers with good qualities so that the fraud from the male escorts were impossible.

            The study seemed very interesting to me because it suggests that, whether or not the institutions involved, the market participants  find ways to get the reliable information and get the prices right . In particular, it was interesting to see that this process has become available with the aid of technology to share and disseminate information.