Public governance of information asymmetries--The gap between reality and economic theory

Abstract

There are numerous situations where governments take action due to systematic information asymmetries in society, while economics textbooks do not offer an integrated theory to justify these interventions in terms of utility. This paper starts with a taxonomy of situations where governments try to correct for information asymmetries. A distinction is made between government interventions due to information asymmetries between market partners, within political markets and between the government and citizens. It is then shown that Public Choice Theory offers only few and Public Finance Theory not enough explanations for the prevalence of such government interventions. Further explanations for government actions are given by Institutional Economics and Cultural and Behavioural Economics. The latter will probably generate the best progress towards creating better explanations.