In a recent podcast on The Indicator from Planet Money, producers Darius Rafieyan and Constanza Gallardo talk about a unique encounter on the dating app Tinder. Here’s the story: Darius matched with a woman named Natasha on the app. The two chatted and got along well so they decided to meet in person at a concert that Natasha was attending. When Darius arrived, he noticed the crowd was mostly young guys that seemed of the same stature and look. About 10 minutes after arriving into this crowd of about 100-150 people, Natasha appeared on stage. She announced that everyone at the venue was here because they had matched with her on Tinder, and that she wanted to gather everyone in person so that she could determine those she thought should make the cut and get to date her. Natasha began listing off deal breakers on stage, instructing anyone who was under 5’10”, had a beer belly, had a long beard, or was named Jimmy to leave.
This mass Tinder date struck Darius as a real-life example of the economic principle of asymmetric information, in which one party in a transaction has information that the other party lacks. This imbalance in information is a situation that differs from the typically studied state of perfect competition. Perfect competition is characterized by the following aspects: a large number of buyers and sellers, so that no single firm can gain market power; homogenous products (products are perfect substitutes); there are no barriers to entry or exit, or firms can open and close freely; and each firm has symmetric information. This symmetric or “perfect” information means that all firms are equally knowledgeable or ignorant about factors relevant to the transaction like price or product quality.
The situation Darius found himself in was not one in which all parties had equal information. He was completely oblivious to the fact that his Tinder date Natasha had been chatting and setting up dates with a bunch of other people on this day. She was acting behind the scenes, where Darius couldn’t see, and planning this huge Tinder meet up.
In Darius’ case, he was unlucky, and found himself in a situation that in economics is deemed a “moral hazard.” Natasha, the informed party, took an action, setting up the mass Tinder meet up, that the uninformed party, Darius, could not observe, harming Darius by hurting his chances of actually meeting her and downplaying her attraction to him. This exemplifies the principal-agent problem that occurs in economics when there is moral hazard in a principal-agent relationship.
A common example given to depict the principal-agent problem is the store-owner and the employee. The store-owner (the principal) hires an employee (the agent) to work in their store. In most circumstances, it is practically impossible for the store owner to constantly supervise the employee. The store-owner may have other store-fronts to supervise and can’t spend all their time in one place, or there might be so many employees that it is difficult to constantly watch each individual. Thus, the situation lacks perfect information. If the store-owner is paying the employee by the hour, it is almost impossible to tell if the employee worked at full capacity each hour. This means that the employee has the opportunity to act in a way that lowers productivity, like not putting forth effort, texting, swiping through Tinder, or even stealing.This behavior doesn’t allow the store to operate efficiently at equilibrium.
Another way of thinking about the principal agent problem is as an example of market failure. A market failure occurs when resources are misallocated and the market fails to reach the efficient price and quantity. In Darius’ case, Natasha’s massive group date may have helped her quickly eliminate Tinder matches that she thought would inevitably not work out, but, it cost Darius the opportunity to have a potentially lovely one-on-one date. Plus, it cost him (and many others) the time it took to get to know Natasha on the app, set up the date, get ready for the date, and then attend the date itself. This represents the opportunity cost. For Darius, this cost outweighed the benefits, and all of this energy and time was spent to just be another fish in a sea of Tinder matches.