Revealed preference

Despite TV2's programming schedule, which is strong evidence the other way, I'm generally inclined to believe that people aren't stupid, and I'm correspondingly inclined to believe that there are fewer markets than you might think where consumers are, supposedly, unable to spot or judge quality differences.

I'm not saying that there aren't any markets where people can't be sure in advance of the quality or features of the good or service that they are contemplating buying, and I'm not saying that we shouldn't use appropriate mechanisms (such as occupational licensing, or information disclosure regulation) in those cases to help deal with what could be a potential issue of market 'failure'. Of course there are, and of course we should.

But the more I observe how people actually behave when buying supposedly 'hard to tell what you're getting' stuff like medical care or an education, the more I'm leaning towards the view that people can make quite a good practical fist of judging quality, that 'market failure' on this score is less significant than you might think, and that there is a stronger case for letting markets do their job and a weaker case for non-market mechanisms.

Earlier I posted about the latest heavy duty research on US charter schools. Consider this quote from the Executive Summary (p8): "Charter school students now comprise more than four percent of the total public school population in the United States, a proportion that continues to grow every year. There are estimated to be over 6,000 charter schools serving about 2.3 million students in the current 2012-2013 school year. This represents an 80 percent increase in the number of students enrolled in charter schools since CREDO released its first report on charter school performance in 2009, Multiple Choice: Charter School Performance in 16 States".

What this says to me is that very large numbers of parents and students in the US (and the equally large numbers of families in Sweden and the UK who have been queueing to get into new private schools there, too) are capable of spotting differences in educational quality - indeed, capable of spotting quite small differences in quality (at least in the US), and acting on them. To think otherwise is to argue that 2.3 million American students and their families are systematically deluded, and on a matter that is of high priority to them.

I very much doubt that, not least because Word Gets Round. People can generally judge whether they or their neighbours have had a good outcome, and they adjust their behaviour accordingly. As one big study of offering more choice in the UK health system unsurprisingly found, when given a menu of hospitals to choose from, "A patient with a bad experience of their local hospital was much more likely to choose a non-local provider compared with someone who had a positive experience at their local hospital" (p65 of the report). People also use workably effective rules of thumb as guides: as the same report noted (p93), patients rated facilities on three big criteria, "cleanliness, quality of care and the standard of facilities", with cleanliness apparently being not only valued for its own sake but also being used by patients as a rough and ready way of steering themselves away from hospitals with high infection rates from the likes of "superbugs".

And people share their experiences, good and bad. I've swapped notes with others about our eye cataract operations, like (I'd guess) every other parent in New Zealand I've discussed the local schools and local teachers with other parents, and I'm a member of the support organisation for people who've been through through the barrel of laughs that is an acoustic neuroma. Do we have useful ideas to share about what worked or didn't? You betcha.

It is of course true that what many professional services provide is multifaceted, and not easily reducible to a single criterion of better or worse. And it is easy to take the next step and say that only the professional gatekeepers can make a good job of telling good from bad, and that consumers don't (or will never) have the information or analytical nous they need to be able to make socially effective decisions, and that markets can't therefore be the way to allocate things.

But that can be a step too far. The marketplace of consumer revealed preference may often need a bit of supplementary regulatory or supervisory assistance to work well: fair enough. But personally I'm becoming more impressed by the growing evidence that in many markets people are adequately capable of sorting the good from the bad.