Abstract
The role and importance of knowledge in economic development is a theme that can be traced back to writers such as Adam Smith, Karl Marx and Joseph Schumpeter. These authors dealt with how knowledge was created, its various uses and how to capture knowledge for gain. Later, writers such as Friedrich Hayek developed this field into areas such as the use of knowledge in society and the role of information in markets. In the economics literature, a critical distinction is made between information and knowledge. Information is seen as data that is out there for most, if not all, to see, whereas knowledge is the use and (unique) interpretation of this data. With the development of the World Wide Web, access to information and the cost of collecting information has changed dramatically. This has implications for its value. Anything that is easy to collect is less valuable than something that is more difficult to collect. Furthermore, something that is valuable will be sought by others and therefore needs to be protected against theft.
Key Terms in this Chapter
Moral Hazard: Concerns the problem of hidden effort, which can result in increased risk of a negative outcome because the person who caused the problem does not suffer the full cost of that lack of effort.
Intellectual Property: A term used to refer to the object of a variety of laws that provide exclusive ownership rights to certain parties.
Tacit Knowledge: A form of knowledge that is not easily transmitted to another person due to its inexplicable nature. It can consist of culture and habits that the holder may not be aware of.
Signalling: A process by which one agent conveys information about itself to another party.
Asymmetric Information: Occurs when one party to a transaction has more information than another and can use this information for its own advantage.
Screening: A mechanism where an uninformed agent can obtain the hidden information of another agent as a way to combat the adverse selection problem.
Tragedy of the Commons: A situation used to describe how conflict over the use of a finite resource can ultimately lead to its destruction.
Adverse Selection: Concerns the problem of hidden information that can adversely affect the efficiency of a market, such as in insurance where unhealthy people are more likely to seek health insurance.
Knowledge: Expertise and skills gain by a person through processing information and experience.