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This chapter explores the literature on the economic importance of small firms in terms of employment and technological change. It considers why small firms are reliant on commercial banks for finance, and why information asymmetries can make a difference in the nature of this relationship.

The quality of political competition at the moment of regime change determined whether East European states embarked on a liberal or an illiberal pattern of political change after 1989. It was initially determined by the presence or absence of an opposition to communism strong enough to take power in 1989, and secondarily by the presence or absence of a reforming communist party. This chapter makes the theoretical case for why political competition is central to understanding variation in the domestic trajectories of post-communist states. It also presents a model of the causal mechanisms that translate different levels of political competition into liberal and illiberal political outcomes.

The resource-based view shares with population ecology, organizational systematics, organizational cladistics, and institutional theory a concern with why firms differ and with what keeps them different. These two questions only have meaning if — as has been the case in the neoclassical theory of the firm — similarities between firms are taken as the default assumption. This chapter distinguishes between ontological heterogeneity — differences in the world — and epistemic heterogeneity — differences in the way that the world is construed. Focusing on the latter, it puts forward an argument for taking epistemic heterogeneity between firms as the default assumption. It starts with a general analysis of how living systems make sense of the world. It then goes on to identify the cognitive activities of codification and abstraction as key sources of epistemic heterogeneity. The findings are applied to those systems called firms where a dominant logic allows epistemic heterogeneity to persist. In some case, this leads to competitive advantage, in others to a debilitating inertia. The implications for a knowledge-based theory of the firm are briefly explored.

This chapter examines whether boilerplate rights deletion schemes can be justified by the “contract-as-product” theory. The contract-as-product theory attempts to sidestep the issue of consent by denying that a particular set of contracted terms is an individual transaction requiring consent in the traditional sense. According to this view, whatever adhesion terms accompany the purchase of a product should actually be conceived of as part of the product. The chapter considers how choice or consent by the recipient enters into the contract-as-product view, and how information asymmetry and heuristic biases render erroneous the assumption of economic rationality. It argues that contract-as-product theory cannot suffice to validate boilerplate in general, or even presumptively.

This chapter examines one major market failure that guilds might have helped solve: the potential for information asymmetries between producers and consumers about the quality of goods and services. Many guilds erected market regulations. To address such concerns, guilds required producers and products to be guild-certified, inspected workshops or wares, and penalized quality violations. Guilds also engaged in many unrelated activities which affected quality unintentionally. The chapter then assesses the evidence on information asymmetries about quality, the institutional mechanisms available to solve them, and the outcomes in different sectors of the European economy. It argues that guilds shed light on the balance between market failures, state failures, and the failure of particularized institutions in intermediating between producers and consumers.

This chapter provides a formal model for incorporating finance within the theory of the firm and for a more nuanced reading of the evolution of capitalistic economies. Financial markets emerged as mechanisms for ensuring the fulfilment of promises made for a return in the future in exchange for money today. The ensuing difficulties were met in part by legal changes, such as the development of limited liability and enforceable fraud standards, along with pragmatic advances in such areas of accountability as accountancy and auditing. Nonetheless, tensions remain due largely to information asymmetry problems and enforcement of difficulties. Given differing rates of return across sectors, the firm takes on the role of an important financial institution. An evolutionary process results in which deficiencies in the market give rise to new contract forms and their exploitation by some participants in the market, thus producing still newer arrangements. The evolution of financial instruments necessarily remains intertwined with the evolution of the firm.

Despite progress in economic science, important disagreements remain about the conduct of macroeconomic policy. This chapter identifies three broad policy positions (‘conservative’ or ‘neoclassical’, ‘standard Keynesian’, and ‘heterodox’) and looks at the theory and evidence behind each. The approaches differ not only on what they focus, but also in their assumptions concerning the structure and behavior of the economy and the behavior of government. The conservative approach focuses on inflation and deficits, which it attempts to address through tight monetary and restrictive fiscal policy. The standard Keynesian approach is more concerned with unemployment and stagnation, which it attempts to address through expansionary monetary and fiscal policy. The heterodox approach looks for non-standard ways (including the use of microeconomic interventions) to stabilize the economy, stimulate growth and employment, and contain inflation.

This chapter addresses the question of how the resources of labour power are supplied to alternative uses from the neoclassical viewpoint of individual rational choice, and further explains various modifications made to the framework of analysis, which are designed to cope with circumstances peculiar to the labour market that cannot be handled well in a standard framework of market clearing. Section 3.1 formulates the theory of general equilibrium for an economy with heterogeneous abilities and heterogeneous jobs, and derives some fundamental properties governing the distribution of income; in particular, it answers the supply‐side questions of how people's diverse abilities are allocated to different job types and how people's preferences for types of job affect such a process; and discusses implications of these on the size distribution of income. Section 3.2 discusses the possibility that each person's ability might change over time, in particular that it might be modified into a more valuable one at the expense of economic resources. Section 3.3 discusses the types of labour market equilibrium that obtain when each person's ability is imperfectly revealed––more specifically, asymmetry of information exists between the workers and the employer in that every worker knows his or her ability perfectly well while the employer cannot observe it directly. Section 3.4 again discusses the implications of informational imperfection, but this time imperfection falls equally (or symmetrically) on workers and employers.

This chapter examines the normative degradation caused by the apparent lack of consent to boilerplate. It first considers the varieties of nonconsent to which consent is contrasted, including coercion and its related conceptions of force and duress; fraud, with its allied notions of misrepresentation and deception; and sheer ignorance. It then discusses problematic consent, focusing on situations involving “information asymmetry” and heuristic biases. It also explores strategies of assimilating World B to consent, with particular emphasis on the devolution of voluntary agreement. The chapter shows that consent is problematic even when recipients click a box that says “I agree,” because it remains unclear what they could actually be agreeing to.

The winner’s curse, at its core, is driven by information asymmetry because the buyer does not know the true value of the acquisition. Overpayment occurs beyond auctions; in fact, the possibility of overpaying arises in a large number of business decisions. The problem is further exacerbated in competitive bidding situations when there are other potential buyers and time to make decisions is compressed. Overvaluing an acquisition has led to reductions in gains, high debt loads, and decreases in the stock price of the firm involved. All of these situations are examined with a combination of accessible theory and very current examples.

This chapter continues the discussion in the previous chapter focusing on the puzzles related to the consumer loan side of the credit card--information asymmetry, information sharing and market origination and expansion. It concludes with a short account of how each was solved in the American payment card market and presents a brief preview of solutions used in the postcommunist countries.

Multinational corporations use cross-border mergers and acquisitions (M&As) as an important restructuring strategy. Multiple motivations exist for cross-border M&As. Most studies focus on returns related to short-term announcements of acquiring and target firms in cross-border M&As and find significant variations in the performance outcomes. The results are mainly driven by market segmentation, the competitiveness of the corporate control market, and advantages associated with intangible assets. Long-term studies on cross-border M&As are limited and show mixed impact on acquiring and targeting firm performance. Information asymmetry, cultural barriers, and cross-country corporate governance all contribute to the complexity of the cross-border M&A activities. This chapter reviews the impact of these factors on acquisition performance.

The global financial crisis is distinctive in its origins, its magnitude, and its consequences. This chapter examines the failures that led to the crisis and, in particular, the important role played by information and incentives problems. On the basis of this diagnosis, the author provides recommendations on how to reform financial regulation to prevent future crises. The crisis provides an excellent case study in the economics of information. Stiglitz illustrates how the models—those used explicitly by or implicit in the mind of both regulators and market participants—ignored the imperfections and asymmetries of information. Since incentives mattered, distorted incentives at both the individual and organizational level led to distorted behavior. These distorted incentives included executive compensation systems in banks and conflict of interest in rating agencies. Additional problems were caused by the repeal of Glass‐Steagall, moral hazard, the use of complexity to reduce competition and increase profit margins, as well as moral hazard problems created by securitization.

Insurance markets are different and special in many ways compared to other financial markets. From their informational structure, the purchaser or prospective insured or applicant is more likely to know more about their own risk characteristics than the insurer. Unlike other markets, information advantage is held by suppliers, who have more idea regarding the product quality than the buyer does. This chapter focuses on insurance products, and in this type of market there is usually a two-way information asymmetry. The insurer knows more about the insurance products, while the client/applicant knows more about the risk of the thing insured than the insurer. The chapter also discusses different types of insurance models. Regulation of insurance markets is also provided, so as to solve the information problem affecting the insurance services. The chapter concludes with the market structure of insurance markets and the prudential regulation required by the governments of countries with such a type of market.

Chapter 1 sets the scene for this book. It does so by charting some of the main technological and economic trends underlying today's information-driven power asymmetries and individuals' loss of control over (personal) data. This is made concrete in four real-word vignettes (on Uber, Facebook, Google and Apple), each highlighting different problematic facets and featuring throughout the rest of the book. The Chapter ends with providing a roadmap for the book as a whole, explaining the central themes and questions and how they relate to one another.

This chapter examines how health economists have dealt with the recognition that the market for health care fails. It examines the reasons for such failure and suggests that too little attention has been given to the formulation of values, with issues around asymmetry of information overly dominating the thinking on market failure. It considers two other key issues around market failure: externalities and public goods. The chapter highlights the problems in conventional health economics in restricting itself to using the values of individuals qua individuals and in being consequentialist; both of these restrictions being true of welfarism as well as of extra-welfarism. It argues that there has been no real attempt to date to provide a comprehensive alternative health economics paradigm in the wake of market failure.

This chapter explores how guilds dealt with human capital investment, a second sphere in which markets are often thought to fail. Many guilds imposed comprehensive training requirements, as in the case of the seventeenth-century Toledo silk-twisters who justified their exclusive legal privileges on the grounds that “the art of silk is useful and has many secrets; because of the quality and secrets of the said art, no matter how deft a man may be, he cannot master them except through long practice and the passage of time.” The chapter then looks at the externalities and information asymmetries which could cause markets in human capital investment to fail, and the ways in which guilds regulated training in pre-industrial crafts and services.

Chapter 1 lays out the basic tenants of our new market theory. Based on the recognition of widespread information asymmetry in consumer markets, consumers have, to an extent, limited understanding of almost all products. The gray-degree of this extent plays a key role. Consumers and businesses have motives and means to shift the gray-scale, and this can impact market transactions in the new supply–demand relation. The key concept is the fundamental asymmetry between consumers and businesses, that businesses are easier to adapt to consumers’ needs rather than vice versa. Hence we advocate finding ways to improve consumers’ selection power incessantly as the way of value creation.