THE TEACHING ECONOMIST - William A. McEachern                 

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Issue 16, Fall 1998

William A. McEachern, Editor

Transparency

The buzzword in international financial circles these days is "transparency." Much uncertainty in Asia and emerging markets stems from the opacity of financial reporting there. Inscrutable balance sheets do not inspire confidence. Nobody wants to buy a pig in a poke (unless, apparently, you are buying into a hedge fund). Providing transparency is a way of reducing transaction costs. All kinds of sellers have an interest in making features of their products quite visible. Grocers package meat and fish in clear wrappers, display the business end of cold cuts in the deli section, and allow customers to pick and choose among fruits and vegetables.

I observed the problem of opacity recently at an annual harvest fair. Long lines at the various food vendors attested to the strong consumer demand that Sunday afternoon. But one vendor, a seller of deep-fried onion rings, had no lines and no customers. I wondered why. Here's what I concluded. The onion rings were being prepared in a windowless trailer. The onions, the cook, and the cooking were all out of view. Only a side door was visible to the public and, through it, business was conducted. I bought some onion rings (purely in the interest of research) to see if perhaps an inferior product explained the lack of customers. The price and quality seemed fine and were certainly competitive with the other greasy offerings of the day. Apparently, the lack of business stemmed from the vendor's lack of transparency. All other vendors had open operations, with the food in full view before, during, and after preparation. Transparency is more important in occasional markets such as fairs, where customers rely less on experience and reputation and more on "what you see is what you get."

The lesson of transparency should carry over to the courses we teach. We should be unambiguous in our course objectives. We do this with clear syllabi, straightforward assignments, and candor about the level of mastery we expect on the exams. Our courses should not be like some gigantic scavenger hunt, where students are supposed to read our minds to determine what they should be studying. I tell my students I want them to be able to see right through me. I'd like to believe that my courses are an open book. I want my students to operate with rational expectations about the course.

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