Friday 29 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly, on August 8 - 14, 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 B, nuking one another, but with each 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 B says it will nuke A, but does not actually possess the requisite nuclear weaponry? The same result will occur if A does not know B is bluffing. But if A does know, B will be nuked. A threat that is believed to be credible is enough to deter, but a threat that is not credible is, therefore, no threat. This may seem straightforward but there are some very profound applications to this notion of credible versus not credible threats.

Taking the scenario above, where B owns no nuclear weapons and A is aware of it, if A and B were to enter into conflict negotiations, A holds all the bargaining power. Thus, a credible threat essentially provides bargaining power or bargaining leverage. If nuclear annihilation were the only bargaining chip available, B would be entirely in A’s power. 

The same is also true of one of life’s most precious commodities, information.

Sometime last year, I called into a radio station to answer the question, “Is it okay for colleagues to ask each other what their salaries are?” The most popular answer to the question, at least among those who called in that day, was: “No, people should mind their own business”. I had a different view. I called in and argued that the reason workmates should try to learn what the others earn is to gain bargaining chips or “credible threats” when it comes 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 is promoted. If she has no information on the type of compensation package that the company provides for her new title, the company can effectively give her a small bump — that does not commensurate with what others may have got — and she would not know any better.

However, imagine she knows what the average compensation bump would be. In that event, she could call out the employer on 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 is rational — if profit maximisation is the chief objective, then any legal method 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, of 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 a greater capacity for self-determination, increasing their bargaining chips and reducing leverage mismatches.

As the reader may see, this argument is also a defence of free speech, or at least freer speech. One of the origins of 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 lens 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 it. It increases their sense of power because it increases their bargaining leverage. It also follows, therefore, that anytime the government or the majority choose to ban or censure 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 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.


Nicholas Khaw is an economist with the Khazanah Research and Investment Strategy Division

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