Thursday, April 27, 2017

Resolving information and trust deficits with technology solutions

Consider the persistence of market failures in markets like that for low-skill labor, agricultural produce, medical services, rental housing and so on despite the introduction of technology solutions. 

In all these cases, it is theoretically possible to use modern technologies to facilitate the matching of buyers and sellers, either by removing matching frictions or easing access barriers. But, as we have seen from across developing countries, these markets remain naggingly impervious to technology solutions. What gives?

It helps to understand that these market failures arise from a combination of information and trust deficits. Accordingly, a household looking to hire a cook or house-help is looking for both information about the available choices as well as some validation of the antecedents (and sometimes the quality) of of the candidates. Similarly, a trader in Tamil Nadu venturing to buy onions from a farmer in Maharashtra seeks both basic information (price, quality etc), as well as the contractual commitment and intentions of the farmer selling those onions. And the home owner willing to rent out her property seeks information about the credit-worthiness as well as the credibility of the lessee. 

In all these cases, and similar others, technology can help bridge only a part of the twin deficit, the one that deals with information asymmetry - choices, prices, credit-worthiness etc. The other part - the one about validation of antecedents, intentions, and credibility - is largely a function of trust. It would take very invasive and complex interventions, with doubtful costs-benefits balance and often distortionary unintended consequences, to address trust deficits using technology.

The alternative is to have human presence on the ground, engaging deeply with the stakeholders, developing social capital, and becoming trust bridging agents. In other words, such markets are likely to respond only with a combination of technology and human engagement. But such engagement takes time and persistent efforts.

But unfortunately, far too many of start-up entrepreneurs, with their quest for instant gratification, prefer to focus on the former and overlook the importance of bridging trust, resulting in still-born markets.

No comments: