Monday, 27 June 2016

Can exclusivity overcome the adverse selection in dating apps?

One of my favourite tutorial examples in ECON110 is about adverse selection in dating markets. As I've written before:
Adverse selection arises when there is information asymmetry - specifically, there is private information about some characteristics or attributes that are relevant to an agreement, and that information is known to one party to an agreement but not to others. In the case of online dating, the 'agreement' is a relationship (or even a single date) and the private information is about the quality of the person as a potential date - each person with an online dating profile (the informed party) knows whether they are a high-quality date or not, but the others who might match with them (the uninformed parties) do not.
An adverse selection problem arises because the uninformed parties cannot tell high quality dates from low quality dates. To minimise the risk to themselves of going on a horrible date, it makes sense for the uninformed party to assume that everyone is a low-quality date. This leads to a pooling equilibrium - high-quality and low-quality dates are grouped together because they can't easily differentiate themselves. Which means that people looking for high-quality dates should probably steer clear of online dating.
Which brings me to The League, which Sowmya Krishnamurthy describes her experiences with here. She writes:
The League is the most exclusive dating app. Founded by Stanford grad Amanda Bradford, The League sets out to match ambitious, interesting professionals in San Francisco and New York City with other ambitious, interesting professionals.
So, can exclusivity overcome the adverse selection problem? Perhaps. There are two ways of dealing with adverse selection problems: (1) when the uninformed party tries to reveal whether the date is high-quality or not, we call this screening; and (2) when the informed party tries to reveal that they are high quality, we call this signalling. There are two important conditions for a signal to be effective: (1) it needs to be costly; and (2) it needs to be more costly to those with lower quality attributes. These conditions are important, because if they are not fulfilled, then those with low quality attributes could still signal themselves as having high quality attributes.

In the case of The League, clearly there is a screening aspect to it. Krishnamurthy explains:
You log in with your Facebook profile, but unlike any apps, The League also asks for your LinkedIn information. The almighty app lords put you on a waitlist and review your “application.” Based on your social media resume, it decides whether you’re in or you’re out (word to Heidi Klum).
So The League may be able to screen out the least desirable dates (at least in theory). Who gets screened out though? The League's "advanced screening algorithm" (their words) probably eliminates at the least those with less (or lower quality, in terms of which college they attended) education, or anyone with a lower class (or no) job.

Does that eliminate the adverse selection problem? I guess that depends on your definition of a 'high-quality' date. There are plenty of well-educated douchebags with good jobs, who could get a place in this exclusive app, which suggests not. As Krishnamurthy notes:
Guys on The League may have more education, ambition and Donald Trump’s phone number, but that doesn’t mean they’re any better at dating. Like other apps, I have several matches where the guys have yet to say anything to me. I guess they’re too busy being masters of the universe to type a message.
And there's still no way for a truly high-quality date to signal that they are high quality. Anything a high-quality date tries to do to set themselves apart can easily be copied by the low-quality dates. Maybe they replace their profile pic with a photo of their credit report?

[HT: Marginal Revolution, back in April]

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