Hidden Information and Sorting Potential Customers: The Applicability of Contract Theory Reconsidered II
If the role of middle managers are information transmission, monitoring and evaluating subordinates' performance, and motivating them, then how will the introduction of artificial intelligence change the organizational form of companies? This case material provides a general analytical tool for estimating those informational costs in organizations. As an example of the application, we here deal with screening customers' hidden preferences in a context of product design pertaining to quality and price in situations where adverse selection takes place, instead of analyzing employment contracts directly. ``Adverse selection,'' along with ``moral hazard,'' is a concept that was proposed in the 1950s by actuaries, with whom joint research by economists led to the formulation of a clear form of expression; it attributes one of the causes of inefficiencies in transactions in organizations to ``hidden information.'' Readers should apply the analytical tool and try to consider changes in organizational structures due to the introduction of artificial intelligence. The mathematical knowledge that the discussion in this case material requires of the readers is differentiation of multivariate linear functions, although they will be able to follow the essential part of the text without knowledge on it.