Shadow of the State or Sunshine of Civil Society by Anthony Gill for American Institute for Economic Research
Why do we do the “right thing?” Why do we treat others with fairness and honesty?
Consider for a moment the common example of a used car sale. In this scenario we have a situation that involves what George Akerlof called “the lemons problem,” which is rooted in the presence of asymmetric information between two parties in an exchange. The seller of the automobile knows much more about the flaws of the vehicle than the buyer, and it is difficult (costly) for the buyer to obtain reliable information about its condition. The seller has an incentive to shine up the exterior of the car to make it look better and misrepresent its true condition so as to sell it for a higher price. If this occurs, the buyer ends up buying a “lemon” – a defective car that is much less valuable than the buyer would have purchased had all information about the auto been known.
The lemons problem is a difficult one for the smooth functioning of markets and, hence, prosperity. If everybody expects that everybody else will cheat them in any given interaction based upon their superior information, no one will want to interact. Indeed, one of the implications of Akerlof’s 1970 paper is that all buyers should be suspicious of used car salespeople, anticipating that every vehicle on the lot is a “lemon,” and hence never buy used cars.
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We love helping others and believe that’s one of the reasons we are chosen as Ambassadors of the Kingdom, to serve God’s children. We look to the Greatest Commandment as our Powering force.
But used cars are sold. Why?
Akerlof briefly suggested several “counteracting institutions” that might correct the lack of trust between buyer and seller including warranty offers, brand names, and licensing. Another solution is for government to create laws that protect consumers from nefarious used car dealers and allow buyers to get their money back if a car (or any other item) fails to live up to promised expectations within a given period of time. We even call such things “lemon laws.”
But the existence and convoluted nature of lemon laws produce their own “asymmetric information problem” wherein it is hard for the consumer to know what these regulations are and how to invoke them. Unscrupulous sellers might fail to inform buyers of these protections or hide them in the ever-increasing fine print of purchasing contracts. (How many of us actually have read, in detail, all of those lengthy “terms of service” that we are asked to sign or click?) Without accurate knowledge of these laws, consumers would seem to be in the same place as they started – can we trust the seller to treat us fairly?
But again, used cars are sold. Why?
One explanation for this may relate to what is called “the long shadow of the state.” Even though the consumer protection laws that are on the books may be difficult to access and understand for the typical consumer (and possibly seller), their mere existence and possibility of being invoked by any given consumer provides enough of a potential threat to motivate the seller to act honestly.
The concept of the “shadow of the state” may be important for understanding why people behave well towards one another. While it is impossible for any individual to know all of the laws, regulations, and ordinances that are increasingly imposed upon them, the vague knowledge that there is some set of state-enforced rules that could be used to punish them prompts people to play nice. We cooperate out of fear of punishment.
