Thinking Economics

Thinking Economics

Most human behaviour can be viewed through an economic lens to identify trends, patterns, biases and misconceptions. This column assesses Nigerian behaviour by applying Economics to behaviour and behaviour to Economics.

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Signalling: How Much Does it Cost to Inspire?

Chuba Ezekwesili

Chuba Ezekwesili

Chuba is a data analyst & the co-founder of Akanka - a global design firm.

Anyone who drives a car in Nigeria should have a fair idea of the trials and tribulations faced when trying to find a mechanic that won’t turn you into his personal ATM. You have no clue how much a compressor costs, or if that’s even what is damaged or if the mechanic will get you the ‘tokunbo’ instead of the original…or worse still, take your money and not replace it.

In such cases, information is asymmetric – the mechanic has far more information regarding the transaction than you and I. He knows what needs to be fixed and the cost, but you don’t. Economists believe that such information asymmetry leads to rational distrust, which can cause markets to break down.

Nobel-winning economist Michael Spence discovered a clever way to bridge this information gap, through “signalling”. For example, a mechanic who wanted to prove his integrity would be confident enough to give the customer an assurance that if the product breaks down soon after repair, he would replace and service it for free. This sends a clear signal that the mechanic believes in the quality of his work. The promised free replacement/service, in this case, is called a “costly signal”.

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