Discuss theoretically when control costs can be reduced by ICT. Give an example of an intermediary which has been successful in reducing control costs.
Paper instructions:
The answer needs to discuss what control costs are and argue how intermediaries can reduce these costs.
Control costs are the costs that agents face to monitor whether the agreed terms of the exchange are actually fulfilled when the exchange takes place. Control costs mainly exist because of uncertainty, bounded rationality and opportunistic behaviour. These factors make it difficult to know if what was agreed when the contract of exchange was settled will actually be maintained when the contract is executed. Intermediaries, especially in the digital economy, can be very successful in helping agents to overcome the frictions which make it difficult to monitor the exchange process and ensure that the agreed terms of exchange will be enforced once the
exchange will be executed.
A good example of an intermediary which is successful in reducing contracting costs is PayPal.
A good answer will discuss control costs and will provide a sound example of an intermediary which reduces them. An excellent answer will articulate the argument and will discuss not only how but also why such an intermediary has been successful in achieving this goal.