About Nick: i am an economist based in malaysia. I write about development economics, while sneaking in a pop culture reference or two.

Information as Bargaining Power

Published in The Edge Malaysia, 8 - 14 August 2016.

In one of the most popular illustrations of game theory, consider the case of two countries, A and B, who are at war with each other. Both threaten to launch nuclear weapons at one another, thereby ensuring mutually assured destruction. As it turns out, the total opposite occurs. The scenario plays out with neither Country A nor Country B nuking one another, but with both withdrawing their own nuclear arsenal. This is because the very threat of a nuclear strike is enough to prevent either country from attacking the other; no one wants to launch a nuke with the knowledge that retribution will occur and that their very own country will be reduced to ashes.

However, what happens if Country B says it will nuke Country A, but does not actually possess the requisite nuclear weaponry? The same result will occur if Country A does not know about Country B’s bluff, but if Country A does, Country B will be nuked. A threat that is believed to be credible is enough to deter, but a threat that is non-credible is, therefore, no threat. This may seem very straightforward but there are some very profound applications to this notion of credible versus non-credible threats.

Taking the scenario above where Country B owns no nuclear weapons and Country A is aware of it, if Country A and Country B were to enter into conflict negotiations, Country A therefore holds all the bargaining power. Thus, a credible threat essentially provides bargaining power or bargaining leverage. If nuclear annihilation were the only bargaining chips available, Country B would entirely be in Country A’s power. The same is also true of one of life’s most precious commodities, information.

Some time last year, I dialed in to a radio station to answer the question, “Is it okay for colleagues to ask each other what their salaries were?” The most popular answer to the question, at least among those who called in that day was, “No, people should mind their own business.” As you may guess, I had a different view. I called in and argued that the reason workmates should try and learn what each other earned was to gain ‘bargaining chips’ or ‘credible threats’ when it came to salary negotiations.

In an environment where only one party, say the employer, holds all the information, the employer has, in essence, total bargaining sway over the employee. Suppose employee C got promoted. If she had no information on the type of compensation package that the company provided for her new title, the company could effectively give her a small bump – non commensurate with what others may have gotten – and she would not know any better. Imagine, however, if she had knowledge of what the average compensation bump would be. In that event, she could call out the employee on their double standards – providing, of course, information asymmetry was the only reason she got a lower bump – and fight for her rights as an employee.

On the other hand, an employer would prefer information to be as tightly preserved as possible. That way, an unscrupulous employer could exploit his or her employees by paying them less than what they would get if they had bargaining chips, or credible threats. In some ways, that employer would be rational; if profit maximisation is the chief objective of the employer, then any legal methods to reduce costs would be warranted. Thus, for employees, if your employer is already pre-set to maximise its own bargaining power over yours, why would you, on your own volition, reduce your bargaining power?

I recognise how very, “Power to the Proletariat” and Marxist this sounds. I am no Marxist, but I strongly believe in the power of self-empowerment, and in this case, the empowerment of employees to negotiate better deals for themselves with a reduction in asymmetric information. To generalise the idea, I would argue that greater transparency of information – not the same as knowledge in this case – arms individuals with greater capacity for self-determination, increasing their bargaining chips and reducing leverage mismatches.

As the reader may see, this argument is also a defense for free speech, or at least freer speech. One of the origins behind the expansion of the idea of free speech is that free speech is protection against the tyranny of government and the tyranny of the majority, two very distinct Enlightenment ideas which became bedrocks of the American Constitution. Free speech was, in some ways, never meant as a tool for one individual to insult and abuse another; rather, free speech was to ensure no government or majority monopoly on speech, enabling citizens to have access to all information possible, thereby allowing for a strong democracy. Free speech, in other words, provided citizens with bargaining chips or ‘credible threats’ in whatever dealings or negotiations they had with government.

Thus, viewed from the lends that free speech really is meant to protect citizens from the tyranny of government or the majority, it therefore makes rational sense that governments or the majority would want to curb free speech. It increases their sense of power because it increases their bargaining leverage. It also follows therefore that any time the government or the majority choose to ban or censor a particular individual or entity for spreading information, it must therefore believe that that individual or entity is a credible threat to that government or majority. Of course, there are exceptions. I highly doubt that a 76 year old man sharing a crude picture in a Whatsapp group could realistically be considered a credible threat but I may be wrong.

Asymmetric information is dangerous. When one party has far more information than the other, it therefore attains a much higher bargaining power relative to the other. That sort of scenario is ripe for exploitation. Thus, it is incumbent on all of us, as individuals and citizens, to reduce information asymmetries, to the best of our wisdom and abilities, wherever they are such that we are able to achieve as much self-empowerment as we can.

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