[FOUNTAIN]More Sea Story blame gameNo matter how democratic and transparent a society might be, there remain unfair situations. Among things unfair, the most serious and hard to solve problem might be the distribution of information. In real life there are many problems due to incomplete and unfair distribution of information, which is also known as information asymmetry. A classic example is when buying a used car. The seller of the used car knows far more than the person who is willing to buy the used car. In a situation where the buyer does not know much about the quality of the used car, it is hard for the seller to get over the temptation of selling the car for a higher price than its actual value. The sellers overcharge the buyers. But when this kind of incident repeats itself, buyers no longer remain silent. They even refuse to make deals with a seller with a bad reputation. In some cases, the sellers will have to shut down their stores. They may have some fun using their position for a competitive advantage, but they cannot cheat the customers forever. George Arthur Akerlof, who served on President Bill Clinton’s Council of Economic Advisors, received the Nobel Prize for Economics with his theory, Market for Lemons, which is based on information asymmetry. Lemon refers to products that just look fancy on the outside, like a shiny used car that may be worthless on the inside.
The scenario where information asymmetry results in a serious problem is in an owner-agent relationship. As the society gets more complex, people entrust experts to make judgments and decisions. One of the well-known relationships is the one between stockholder and CEO. But there is no guarantee that the agent will be loyal and work sincerely for his owner. The owner who entrusted the agent with the work lacks knowledge related the field compared with the agent, so it is hard for the owner to observe and supervise the agent. This is where the moral hazard occurs among the agents. It means that the agent has a high chance of hurting the owner’s profit by putting his own profit motive in front of him.
The Sea Story scandal can be seen as a moral hazard of the agent resulting from information asymmetry. The owners, which are the people of Korea in this case, entrusted the agent, which is the government, but the government turned the whole country into a gambling scene. And now it is saying that because of restricted information, it was a policy failure. Government claims it did not know about the problem, since the dog did not bark. If this kind of incident keeps repeating itself, then the owner has no choice but to replace the agent.
by Kim Jong-soo
The writer is an editorial writer of the JoongAng Ilbo.