November 29, 2003
Double moral hazard
Slashdot is linking to a pair of articles (1, 2) about some really interesting economic underpinnings of filesharing. They're both by one Umair Haque of the London Buisness School. They make for interesting reading, as do the writings on his blog.
In essence, Haque argues that we can view the record labels as being contracted by consumers to perform a task that consumers aren't normally capable of doing: researching and developing music that we like. However, as the labels, our "agents" in economic-speak, are capable of hiding their activities to an extensive degree, they create what is called a "moral hazard" in which the "principals" of the contract - us - are incapable of monitering the activities of their agents. The way around this is filesharing, because that allows us a way of seeing which music we like before paying for it. But this creates a second moral hazard because not only are the activities of the principals almost entirely hidden from the agents, but filesharing allows us to avoid paying altogether. Still, most people do it because they don't have any other option if they want to listen to good music without having to trust the RIAA's taste (which sucks).
Haque's argument is much more detailed, but that's it in a nutshell. He then discusses music services like iTunes and suggests why they won't solve these problems.
