Arrow’s Information Paradox

Arrow’s Information Paradox is a term that refers to economics, specifically the values of patent rights and the value of intellectual property. How does one determine the value of an idea? It was named for Kenneth Arrow, an American economist and joint winner of the Nobel Prize for Economics along with John Hicks. Intellectual property can mean ideas as well as technologies and innovations that are held under patent. The paradox states that before a company is willing to buy a technology or idea it has to understand everything about it; how it works, how it will benefit them, how it should be created or manufactured, etc. The problem is that through this conveying of information the purchaser has essentially learned everything they need to know to develop the technology or idea for themselves without having compensated the seller at all, therein lies the paradox. Without intimate knowledge of a technology or idea a purchaser will not want to buy it, and with that detailed information they have no need to purchase it from the seller.

The information paradox has a lot to do with patent rights, the need for them and also the need for their limitation. The paradox presents the need for patent law, otherwise the transfer of informational or intellectual property would be extremely chaotic. Some would argue that the market for information would not exist without patents on intellectual property. People will always need information in some capacity, patent law makes it possible to put a dollar sign on that information; but how do we determine the value of information? Certainly the information’s relevance to a certain area of business has some effect; then there is the reliability of the information being given, can the source be trusted to produce something valuable?; the last determining factor is the capability of the information, how likely is this information true or correct? These three factors are used in order to determine the value of intellectual property. Before patent law came around there were ways of disclosing information and still make profit from it even though nothing was legally binding the buyer. For example, a company or person would give information to another company or person for free; after that the first company would then demand compensation, otherwise they would give the information to other companies thus threatening the first company’s new monopoly on the information. Another way that sellers were able to maintain the value of their information was by giving away only part of it, proving that they had an idea or technology of value and then once the technology was paid for they would release the rest of the information.

In short, Arrow’s Information Paradox is the reason for the existence of patent law and many of the laws we have on intellectual property. In the context of the course the paradox is extremely important; we are learning about the transmission of information over the course of history, and this paradox is important when thinking about how information is traded around the world.

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One thought on “Arrow’s Information Paradox

  1. Interesting. I had not thought of information as a commodity before, but the way you framed it made sense. It is so different than material commodities, because with those you can convey information without giving away the product. I wonder to what extent we will study the ways in which the people who sold information navigated this paradox.

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