Wednesday, July 22, 2009

Market failure in the EA spouse case

There's an interesting class of market failures that occur in the presence of both imperfect information and high switching costs. As an example, consider the infamous EA Spouse case (background on the wikipedia page). Quick synopsis: a programmer joined EA with the expectation that working conditions would be relatively sane. After starting work, it became increasingly apparent that the company was a sweatshop in perpetual crunch mode. From the original EA spouse post:

Electronic Arts offered a job, the salary was right and the benefits were good, so my SO took it. I remember that they asked him in one of the interviews: "how do you feel about working long hours?" It's just a part of the game industry -- few studios can avoid a crunch as deadlines loom, so we thought nothing of it...

Within weeks production had accelerated into a 'mild' crunch: eight hours six days a week. Not bad. Months remained until any real crunch would start, and the team was told that this "pre-crunch" was to prevent a big crunch toward the end; at this point any other need for a crunch seemed unlikely, as the project was dead on schedule... Weeks passed. Again the producers had given a termination date on this crunch that again they failed... Now, it seems, is the "real" crunch... the current mandatory hours are 9am to 10pm -- seven days a week -- with the occasional Saturday evening off for good behavior (at 6:30pm). This averages out to an eighty-five hour work week. Complaints that these once more extended hours combined with the team's existing fatigue would result in a greater number of mistakes made and an even greater amount of wasted energy were ignored...

And the kicker: for the honor of this treatment EA salaried employees receive a) no overtime; b) no compensation time! ('comp' time is the equalization of time off for overtime -- any hours spent during a crunch accrue into days off after the product has shipped); c) no additional sick or vacation leave. The time just goes away. Additionally, EA recently announced that, although in the past they have offered essentially a type of comp time in the form of a few weeks off at the end of a project, they no longer wish to do this, and employees shouldn't expect it. Further, since the production of various games is scattered, there was a concern on the part of the employees that developers would leave one crunch only to join another. EA's response was that they would attempt to minimize this, but would make no guarantees.

In discussions of this story when it became widely publicized, a very common response was to say that either the programmer "should have known" what he was getting himself into, and/or if he didn't like the working conditions he should have simply quit - no one was forcing him to work for EA. While this is technically true, it is beside the point - the employee in this case accepted the job given imperfect information about the working conditions (we can quibble about whether this was his fault, but that is not relevant). After the fact, if he wished to find a different job he would be forced to incur various switching costs. Such costs could be substantial for an individual changing jobs (searching for a job takes a lot of time and energy, may require moving expenses and so forth).

In general, for a person in a job that he might not have accepted given better information, the switching costs give the status quo greater net utility than it would have on its own. This leads the employee to remain at the job longer, until conditions deteriorate (or the employee's utility function changes) to the point where the switching costs become acceptable.

This is a market failure. Imperfect information causes the market to misdirect productive capacity; switching costs then sustain the resulting inefficiency. In the presence of better information or in the presence of zero switching costs, a company like EA would not be able to attract and retain programmers at the salary they offered. It is only when both factors combine that EA's strategy becomes effective. In fact, given the presence of these factors, it may be the case that EA's strategy actually gives them a competitive advantage over companies that are more up front about their working conditions.

There are a lot of possible responses to this sort of market failure. Do we pass laws preventing these sort of working conditions? We could, but then we restrict legitimate market activity. Suppose EA were completely upfront about their working conditions and offered increased pay as compensation. If a programmer decides the deal is worth it to him, should he really be legally prevented from accepting the job? By having such a law we are restricting a whole class of mutually beneficial transactions.

No, the ideal way to deal with this sort of market failure is to provide the market with better information. This allows legitimate, beneficial activity to continue while preventing the inefficiency that would otherwise occur when employees accept jobs under assumptions that are out of sync with reality. But how do we provide the market with better information? I'm not sure. In principle, the government can play a role here - for instance, it can force employers to provide information about working hours. But again, this is a very rigid tool - in addition to increasing the overall regulatory burden, laws like this will always lag behind the needs of the market. If a new sort of information becomes relevant to programming jobs, the law does not automatically adapt to compel the release of this new information. Involving the government means we must also consider the possibility of government failure - even if government action can in principle make the market more efficient, in practice it isn't guaranteed that it will do so given the incentives of politicians and voters and the limitations of the people involved.

I'm very interested in understanding when markets will, via endogenous processes, tend to endow their participants with sufficient information relevant to market decisions. That is, when is a market naturally induced to provide its own information, and when it is an equilibrium for market participants to withhold information? A related question is: if we factor in the cost of information acquisition, when do the costs of acquiring information exceed its value to participants? And how should information be valuated? A better understanding of these questions might lead to ideas for how to coax a market into providing participants with better information - self-provided information like this will I think tend to be more subtle, more adaptive, more specialized, and more responsive to the needs of market participants.

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