The information asymmetry in aggregator biz makes regulation necessary

The extreme information asymmetry in aggregator business is creating market inefficiencies, including breaches of contracts. This makes regulation necessary

Earlier this week, I was obliged to use an aggregator taxi. Since it was a long ride, I got talking to the driver. One of the things the man said was that he hated parting with around 25 per cent of the fare as commission to the aggregator. He thought 15 per cent was fair.

The other thing he said was that sometimes he makes a private deal with the passenger by switching off his phone so that the aggregator has no idea where he is. The deal is that he will drop the passenger wherever he has asked to be dropped off but to pay in cash. Many passengers don't mind.

I have been asking around since then, and it turns out that this is becoming increasingly more common because though operating costs have gone up, the commission to the aggregator has remained the same.

Not just that, there can often be a lag between when the payment is due and when it is paid. As it is hard to keep track of all the rides in a week, sometimes the drivers suffer a loss.

They have found a solution to cut the intermediary out at least a few times a month. That makes it fair and square, according to them. The trick is to do it sparingly.

This is a case of what economics calls information asymmetry, where among the three contracting parties, one side has more and vastly better information than the others. This can, and does, lead to market failures because the transactions become very inefficient.

This information asymmetry is probably true of all aggregators, not just taxi services. Sometimes the inefficiency can be so high that the market must be regulated. Nothing less will do.

We in India have recognised this for many years but only in a very bureaucratic way, where the transport ministry has issued the usual "guidelines" without proper input from economics. In fact, with a few honourable exceptions, such as when the late Rahul Khullar was chairman of the Telecom Regulatory Authority of India, this has been the general modus operandi of all governments.

It's a sad mistake because there is so much literature available on the subject of information asymmetry. Indeed, at least four Nobel prizes have been awarded for work on it on different occasions — to George Akerlof, Michael Spence and, James Mirrlees & William Vickery.

However, their analysis has been in the context of developed financial and product markets where labour behaviour vis-a-vis contracts is not a factor. In India, it's different. We are a labour surplus, poorly educated economy. In my view, this has to be incorporated into the existing analysis because, as a result of labour attitudes, the incentive structures are totally different here.  

The dimensions of information asymmetry between employees and employers are varied and deep in India. They have many manifestations, but the worst aspect of these is that they encourage breaches of contracts.

This happens far more often here than in the developed markets. The market is, therefore, highly inefficient not only because of the huge information asymmetries but also because of the labour factor.

In simpler terms, information asymmetries in a labour-surplus economy, where workers are poorly integrated into the formal economy, tend to accentuate disregard for contractual obligations and heighten market inefficiencies. This entails huge friction costs.

That's why the government needs to commission some analytical studies that take the existing western analysis of market inefficiencies caused by information asymmetry as their point of departure. There are enough theorists at, say, the Indian Statistical Institute, the Delhi School of Economics, and a few other places.

Rs 10 crores to each institution will do the job.