It appears as though Akerlof’s “market for lemons” that Bruce Schneier wrote about has caught on.

While hiring is certainly a case of information asymmetry like the “lemons market”, there are some other factors at work:

The Principal-agent problem: even once you’ve hired someone, there are some asymmetries at work of a different sort: your motives may not be the same as your employer’s, and it may be difficult for the employer to monitor what you’re doing. If you’re digging ditches, it’s pretty easy to see what you’ve done, and how well you’ve done it. If you’re creating a complex system, on the other hand, it’s much harder, even for an expert, to tell what sort of job you’ve done, let alone for a “pointy haired boss” with little knowledge of the domain at hand. The wikipedia article discusses different schemes and problems with attempting to align the interests of employee and employer.

The curious may wonder why anyone hires anyone at all, rather than just having all work be a series of contracts between independant individuals, rather than companies and employees. Ronald Coase asked the same question a number of years ago, and determined that the answer lies in transaction costs – the subtle friction that permeates any real world exchange. Think about having to continuously search for potential contract workers, and bargain with them over prices. It’s easier to employ someone, and be able to count on their work, at a steady rate, than to have to outsource important functions continuously and at variable prices. It’s also probably cheaper in some ways because of people’s tendency to be “risk averse” – they prefer the steady but stable job over a more variable, but higher paying income stream. As we’ve seen in recent years, as transaction costs have come down, it does become easier to outsource certain kinds of work, and we have seen more of it.

Economics provides a fascinating lens through which to view the world of high tech and information goods, and the superficial overview that I’ve attained has certainly served me well. A good place to start, besides perusing wikipedia, is the book Information Rules by Hal Varian and Carl Shapiro.