Supports: Macroeconomics, Chapter 5, Section 5.3 or Chapter 6, Section 6.1; Microeconomics and Economics, Chapter 7, Section 7.3 or Chapter 8, Section 8.1.
Image from Reuters via the Wall Street Journal.
A recent paper by Iyah Rahwan, of the Max Planck Institute for Human Development in Berlin Germany, and colleagues raises the possibility that dating apps, like Tinder, OkCupid, and Bumble, may have a principal-agent problem. Dating apps—like nearly all other subscription apps—generate more income if subscribers pay for the app over a longer period of time. Many people use dating apps in the hope of connecting with another app user with whom they can have a long-term relationship.
a. What is the principal-agent problem?
b. Explain whether dating apps may have a principal-agent problem. If they do, who is the principal and who is the agent?
c. How does your answer to part b. affect your estimate of how likely people using dating apps are to find a long-term relationship using these apps?
Solving the Problem
Step 1: Review the chapter material. This problem is about the principal-agent problem, so you may want to review either of the two sections in which the principal-agent problem is discussed: Macroeconomics, Chapter 5, Section 5.3, “Information Problems and Externalities in the Market for Health Care” or Chapter 6, Section 6.1, “Types of Firms” (Microeconomics and Economics, Chapter 7, Section 7.3 or Chapter 8, Section 8.1.)
Step 2: Answer part a. by defining “principal-agent” problem. Principal-agent is defined in the textbook this way: A problem caused by an agent pursuing the agent’s own interests rather than the interests of the principal who hired the agent.
Step 3: Answer part b. by explaining why dating apps may have a principal-agent problem and by identifying who is the principal and who is the agent in this situation. With dating apps, the principal is the app user who, typically, uses the app to help find a partner for a long-term relationship. The owners of the dating app are the agent because they have been hired by the app user to help the user achieve the goal of starting a long-term relationship. Unfortunately, the owners of the dating app have a different goal than does the app user. The goal of the owners is to have users keep subscribing to the app. Anyone who finds a long-term relationship using the app is likely (we hope!) to drop his or her subscription to the app. Therefore, whereas the app user would like to quickly find a partner for a long-term relationship, the owners of the app want the app user to take a long time to find such a partner.
Step 4: Answer part c. by discussing how the principal-agent problem may affect the likelihood of someone using a dating app successfully finding someone for a long-term relationship. The answer to part b. indicates that dating apps may have an incentive to make it somewhat more difficult to find a long-term relationship using the app—perhaps by employing a matching algorithm that doesn’t result in users easily finding good matches. Therefore, it’s likely that the principal-agent problem make it less likely that people using dating apps will successfully find a partner for a long-term relationship.
Source: Iyah Rahwan, et al., “Price of Anarchy in Algorithmic Matching of Romantic Partners,” ACM Transactions on Economics and Computation, Vol. 12, No. 1, pp. 1-25.
H/T Nicholas Christakis on X.
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