On the Economic Virtues of Incompetency and Dishonesty

Most people would agree with the statement that if incompetency and dishonesty were costless to eliminate their optimal level would be zero. The reasoning would be that incompetency is wasteful since it leads to mistakes while dishonesty is wasteful because if faulty information is relied on it can lead to suboptimal decisions. But the existence of dishonesty and incompetency can also have secondary effects which may be beneficial. In fact, in this paper I will present a simple example of a market with asymmetric information in which these second order effects dominate and present a clear case in which positive levels of incompetency and dishonesty are socially beneficial.