Saturday, December 31, 2011

Finding a life partner - a market failure?


Finding a life partner (or rather the right partner) is hard and even when a relationship is formed, more often than not it ends with both parties and their family being hurt. In economic terms, finding a
life partner is an utter “Market Failure”!
For those of you who never took Economics Theory in college or have forgotten what “Market Failure” is, it is exactly what the name suggests. It is a situation where the free market fails, the status quo is not the most efficient solution, and there is opportunity for all parties to be better off, without making anyone worse off. Look at all the lonely people who are looking for someone to share their life with and are not finding them. Now there are so many reasons for relationships not getting formed or not working out, and they mostly have to do with people's mental and emotional states and their readiness than the outside world. But for the sake of this article I am going to look at it at a macro level and like a policy maker would.

Among other things, market failures happen due to inefficient markets, information asymmetry, high transaction costs, externalities, and public good problems. I am not going to explain the meaning of these terms because I am afraid I might bore you, and I am sure even if you do not know what they mean, you will understand them as I explain how they cause a market failure in the dating world. First a warning though: I am going to talk about love and love partnerships as if they were commodities being traded in a market! If that is too crass for your taste or offends you in any way, please stop reading!

Here are the fundamental assumptions I am making.
  1. There is at least one “perfect match” for most men and women on this planet. (There are probably many!)
  2. The definition of a “perfect match” is somewhat loose but essentially it means someone you can happily live with for a “significant” period of time. (What can I say? Call me a cynic but I just cannot bring myself to talk about “ever-after” even in theory!)
Based on the above, an “efficient” love/life partner market is one where most men and women find their perfect matches and live together happily, for a significant period of time. No market is 100% efficient so we do not need 100% of the people to find their perfect matches. We just need the percentage to be closer to that of other efficient markets. In my opinion, here are the ways dating is a market failure.
  1. The simplest form of failure is when two people who are the perfect match for each other and could live together happily, never meet. This is market failure due to an inefficient market. Two people who can benefit from meeting, connecting and being with each other simply cannot find one another. Craigslist and E-Bay were formed to fix this sort of market failure for second-hand item sales. Dating sites are trying to do the same for the dating market. Still, there remains a large population who is looking for “the one”, and cannot find him/her.
  2. Sometimes two people who are the perfect match meet but do not connect because they do not know or trust each other. Each person knows more about themselves than they know about the other person. They are scared of jumping in because they cannot trust a stranger. They go about their lives and a connection that could have been made is missed. This is market failure due to “information asymmetry”. The used car market is fraught with this kind of market failure. A lot of people who would benefit from buying a used car do not do so because they are afraid they may get a lemon. That is why independent mechanic certifications and government regulations for used car sales have been created. But how do you remove information asymmetry in the dating world? By wearing your heart on your sleeve? Putting as much detail on your online dating profile as you can? (don't people lie on those all the time)? Or getting your ex to write you a reference letter?!
  3. Sometimes the two people want to invest the time, energy, money, and emotions to get to know the other person to remove the information asymmetry, but once they get into it they realize the risks are too big and the price they potentially need to pay if things do not work out, is too high. So, they choose to stop while they are ahead. This is market failure due to high “transaction costs”. It is like when you need a complex, all encompassing and expensive contract for a business transaction that you cannot be sure would even be worth the lawyers' fees. In case of love partnerships, the time, scarred emotions, relocation costs, costs of leaving a job, divorce lawyer fees, or simply the opportunity cost of not meeting someone else, can all be really high. Sometimes people choose to walk away and not risk it.
  4. There are unfortunately times that two people who are NOT the perfect match for each other meet, connect, and end up hurting one another and people around them in the end. This is a market failure due to “externalities”, or negative externalities as some call it. A negative externality is an undesirable byproduct of a transaction. Environmental pollution is an example of a negative externality. Usually, regulatory bodies need to get involved to protect the society from negative externalities because they harm more than just the parties involved in the transaction. I guess in the world of love relations, divorce laws, well-fair, or children's services do create some protection, but I am sure you agree that they do not come close to covering all the potential costs. After all, how do you put a price on a broken heart?
  5. Relationships are full of potential “free rider” problems. This term refers to cases where someone uses a resource without paying for it. In the business world this usually happens with public goods, like when someone gets on the bus without paying for it. If enough people do it, the bus company will shut its doors and the market fails. In a domestic partnership, both people benefit from a clean house, well brought up children, the money, and all that the family owns. Does everyone put in the same amount of effort? How do you minimize the risk of one partner free-riding on the efforts of the other one and ruining the partnership?

Recently I looked into various dating websites and dating apps, to see if and how they address any of these market failures. I may write about my findings in another post, as that in itself is a long story. In the meantime, let me know what you think. Anything I have missed or misjudged that you want to point out? Let me know, and thanks for reading my blog :-)


4 comments:

  1. Well done Maryam, interested to see your finding on the next blog. The only thing I suggest to add would be to explain "the perfect match" in your assumption that is where a lot's of failures happens.

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  2. If you ever meet your perfect match, run away. Perfect relationship is like retirement, there is nothing left to work on.

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  3. As I said in the article, a "perfect match" is someone you can live with happily for a significant period of time. It is hard to define these things. That is why I said it is a loose term. You can associate whatever you think you are comfortable with, or whatever you are looking for. Zoran, I did not mean that things will all be perfect or that it would be for ever.

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  4. Dear Maryam,

    I think that your analogy breaks exactly on the part that you are not rigorous and somewhat "loose". Once "perfect" is not well defined and two parties have different definition of "perfect" there is no framework to run your optimization. It may even create asymmetry in a sense that you may not be the perfect match to your own perfect match! But I also agree with something that Zoran eluded to: "to work on something". One main characteristic of us, humans, is adaptation. We adapt ourselves to situations, and even people, in particular if they have authority over us like our boss/manager, but we fail to adapt and dance with the ones we love. And I think one reason for that is the expectation. We expect them to also adapt, and once there is a lack of communication and the expectations are not met, the disappointment takes over the relationship. I think the set of "perfect match" for every one is a very large set, as long as there is 1) communication of expectations and 2) willingness to work on to adapt to the other party. It is very hard to have a perfect band/team of the bat. There must be a lot of practice to bring in the harmony. -Voids

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