Research on Overcoming the System of Information Failure

Author: Ying Feihu
Publisher:
Publish Date: 2004-12-01
Features: The market system is a decentralized decision-making system where market entities possess extensive decision-making power. Under this system, various entities, including public authorities, often need to make various decisions. Information is a resource that constitutes the foundation of decision-making, and therefore, entities in the market system rely more heavily on information. However, in reality, sufficient and effective information does not always exist, and decision-makers often face information failure issues, leading to numerous negative effects. For this reason, it is quite necessary to conduct research on the institutional overcoming of information failure. Through this study, the book aims to find the best institutional path to address various information failure issues. Information failure issues need to be overcome by institutions to ensure that information is as fully, accurate, and symmetrically distributed as possible. At the same time, the formulation and implementation of institutions are also influenced by information. Many institutions are altered in content or even cannot be formulated due to information issues. Based on this line of thinking, the book carries out its research. The entire book consists of eight chapters and, according to the above structural system, can be roughly divided into three parts. Part I consists of Chapter 1, which primarily elaborates on the manifestations, harms, and general institutional overcoming of information failure. This part forms the foundation for the subsequent two parts of the study. The second part consists of Chapters 2, 3, 4, 5, and 6, totaling five chapters, and is the main body of this paper. It primarily examines how institutions influence information. In this part, Chapter 2 studies the institutional overcoming of insufficient information; Chapter 3 studies the institutional overcoming of information asymmetry; Chapter 4 studies the institutional overcoming of incorrect information; and Chapter 5 primarily examines how institutions reduce information costs. The content of this chapter is partly scattered in Chapters 2, 3, and 4. It is still included as a separate chapter for specific discussion because the reduction of information costs is the most important indicator of whether information failure issues are overcome. A sufficiently reduced information cost generally indicates that decision-makers have access to fully, accurate, and symmetrically distributed information, which helps reduce decision-makers' costs and increase their decision-making benefits. Therefore, it is necessary to study the obstacles and paths related to the reduction of information costs. Chapter 6 studies public power from the perspective of information, primarily focusing on the issue of mandatory disclosure of public power information. This is essentially a form of institutional overcoming of information asymmetry, so it is reasonable to include it in the discussion of mandatory disclosure institutions in Chapter 3. However, since the disclosure of public power information involves the public power level and has more special characteristics compared to mandatory disclosure institutions for private power entities, this paper dedicates a separate chapter to its elaboration. The third part consists of Chapters 7 and 8, which primarily study how information influences institutions. Logically, it is parallel to the second part, which examines how institutions influence information. Among them, Chapter 7 studies the impact of information on the law, and Chapter 8 studies the impact of legal professionals' perspectives on information acquisition during institutional change. Specifically, Chapter 1 provides a general overview of information failure and its institutional overcoming. This chapter focuses on analyzing the harms of the three forms of information failure—insufficient information, information asymmetry, and inaccurate information. It points out that information failure not only increases the defensive and information costs of market entities but also leads to decision-making errors or misjudgments by various decision-makers. The moral hazard caused by information issues leads to market inefficiency, and relationship transactions resulting from information failure artificially fragment the market. Adverse selection caused by information asymmetry may even lead to the collapse of the market. The widespread pursuit of self-interest maximization by economic agents in the market further highlights the harms of information failure. Therefore, it is necessary for various institutions to overcome information failure, and among these institutions, economic law has a unique advantage and constitutes the primary and most important institution for overcoming information failure. In Chapter 2, after analyzing the reasons for insufficient total market information, the study explores the institutional overcoming of insufficient information from two aspects. This chapter first analyzes the plan law from the perspective of information, arguing that under the market system, plan law is primarily a legal form that optimizes the decision-making of market entities through guiding plans. The main function of plan law is to provide public goods of information. Supporting the private production and trading of information through public power also helps incentivize market entities to produce information products, thereby partially addressing the issue of insufficient information. Chapter 3 is one of the most important contents of this book. Faced with various institutional solutions to information asymmetry, this chapter classifies them into direct institutional solutions and indirect institutional solutions. The direct overcoming of information asymmetry is primarily achieved by increasing information supply, with multiple paths available. First, information providers can directly provide information to information receivers, which is a form of mandatory disclosure. Second, information can be provided by third parties with no direct stake, which is a system based on reward-based reporting. Third, public authorities can provide information to information receivers. Fourth, information can be provided by other operators in the same industry. Fifth, a classification information evaluation system based on a social credit system is established to collect, process, evaluate, and transmit information. The indirect overcoming of information asymmetry is primarily achieved by reducing information demand or transforming information demand forms, with multiple paths available as well. First, institutional innovation can be avoided to avoid the premise of information asymmetry. Second, an interest incentive system can create interest communities, eliminating the premise for the harm of information asymmetry. Third, effective supervision of information providers can prevent them from exploiting their advantages for personal gain. Fourth, a non-price mechanism based on integrity can directly increase the amount of information possessed by information receivers. Fifth, limiting the benefits obtained by information providers or increasing their costs can make information asymmetry merely a harmless state. Additionally, poor institutions can artificially create more information asymmetry, so good institutional arrangements can help avoid unnecessary information asymmetry. In Chapter 4, after analyzing the causes of incorrect information, the study focuses on four institutional paths for overcoming incorrect information. First, public power can directly prohibit incorrect information to prevent incorrect information manufacturers from profiting. Second, public authorities or other public welfare institutions can directly provide correct information. Third, obstacles can be set for providing incorrect information to increase the difficulty of providing it. Fourth, the institutional environment for passively creating false information can be eliminated. Finally, the study illustrates how institutions should guide people to provide correct information with the example of a company whose license is revoked for not participating in annual inspections and how this information is eliminated. Chapter 5 primarily studies the reduction of information costs. After providing a general definition of information costs, the study focuses on analyzing the reasons, necessity, and obstacles for institutions to reduce information costs. Based on the general paths for institutions to reduce information costs, the study analyzes the path of contract law to reduce information costs, with a focus on the economic law path. These paths mainly include increasing information supply, reducing information demand, mandatory standards, and market access systems. Chapter 6 primarily studies the mandatory disclosure system of public power information, which is a system that realizes citizens' right to know and eliminates information asymmetry between public authorities and the public. Due to excessive focus on state secrets, excessive reliance on the capabilities of public authorities, neglect of the connection between public authority interests and public power information, and excessive focus on self-interest by public authorities and their officials, this disclosure system has not been effectively established in China. Currently, the main defects of this system are insufficient effective information, issues with internal documents, problems with the form of information disclosure, paid disclosure, and procedural obstacles in information retrieval. China's entry into the WTO has made the establishment of this public power information disclosure system even more urgent. In the process of building relevant institutions, issues such as the disclosure and exemption of public power information, the selection and allocation of information disclosure methods, the fairness and timeliness of disclosure, the procedural protection and judicial relief of the right to know, and the setting of legal liabilities all need to be addressed. Chapter 7 primarily studies the impact of information on the formation and implementation of law. In the process of legal formation, the static view of information is the most harmful, and laws influenced by it are easily countermeasured and often inefficient. Therefore, it is necessary to collect dynamic rather than static information for dynamic legislation. This requires procedural and organizational guarantees for sufficient information, establishing a legal formation model that primarily evolves spontaneously with some human design, and avoiding excessive forward-looking legislation. The transplantation of laws must be cautious, and social investigations should be emphasized during the legislative process. Major legal changes also require small-scale pilot programs. In the process of legal implementation, information issues may constitute the largest obstacle to legal implementation, and information publicity as a legal liability can help promote legal implementation. Chapter 8 studies the issue of legal professionals' perspectives and information acquisition during institutional change, proposing preliminary suggestions on how to expand legal professionals' perspectives. Logically and in terms of content, the content of this chapter should be included in the fifth section of Chapter 7 titled "How Legal Formation Fully Utilizes Various Information." Compared to the other parts of the fifth section "How Legal Formation Fully Utilizes Various Information," the author considered the following two points: , the content of this section is relatively important; second, the content of this section is relatively lengthy. Therefore, it is included as a separate chapter for elaboration. Since legal professionals' perspectives directly determine the amount of information they obtain regarding relevant issues of institutional change, legal professionals with narrower perspectives have relatively weaker information acquisition capabilities, while those with broader perspectives have relatively stronger capabilities. The phenomenon of "turning a blind eye" is more likely to occur among legal professionals with shorter perspectives. Compared to non-legal professionals, legal professionals tend to have a preference for formal logic, neglect social realities, overemphasize fairness and justice while neglecting efficiency, and show a bias against practical tools and perspectives such as law and economics. Their idealized understanding of legal functions, excessive preference for legal tools, and tendency to reject other perspectives and tools due to legal inertia lead to relatively short-sightedness. Generally, legal professionals with shorter perspectives are more likely to obtain incorrect, insufficient, and incomplete information about institutional change, leading to incorrect institutional change decisions or suggestions, or incorrect understanding of existing institutions. Therefore, it is necessary to expand legal professionals' perspectives to enhance their information acquisition capabilities.