Information As Human Capital: Toward a Time-Use Approach

ABSTRACT - This paper treats information acquisition as investment in a specialized form of human capital. The cost of that investment is measured in terms of the consumer's time. A series of hypotheses are offered concerning the impact of age, education and income on consumers' information acquisition behavior.

Citation:

Roger M. Swagler (1980) ,"Information As Human Capital: Toward a Time-Use Approach", in NA - Advances in Consumer Research Volume 07, eds. Jerry C. Olson, Ann Abor, MI : Association for Consumer Research, Pages: 195-197.

Advances in Consumer Research Volume 7, 1980     Pages 195-197

INFORMATION AS HUMAN CAPITAL: TOWARD A TIME-USE APPROACH

Roger M. Swagler, The University of Tennessee, Knoxville

ABSTRACT -

This paper treats information acquisition as investment in a specialized form of human capital. The cost of that investment is measured in terms of the consumer's time. A series of hypotheses are offered concerning the impact of age, education and income on consumers' information acquisition behavior.

INTRODUCTION

It has been nearly two decades since researchers first began to give serious attention to the role of information in consumer behavior. During that time, the importance of information has been accepted and an impressive amount of effort has gone into research in the area. The results have been encouraging, but because of the diverse nature of the investigations, it is difficult to fit together the numerous partial explanations which have been offered concerning consumers' information acquisition behavior.

In part this is due to the tendency in both theoretical and empirical investigations to focus on specific situations. Stigler's original formulation was developed in terms of the search process for a single purchase (Stigler, 1961). Nelson later expanded the analysis to information gained through experience. He was describing a learning process, but he confined his attention to the analysis of that process in a particular purchase situation (Nelson, 1970). He did not explore the obvious relationship to learning over time and its influence on consumer behavior.

Empirical investigations have also tended to be situation specific. Research has dealt with purchases of specific products (Goldman & Johansson, 1978), identified groups of consumers (Engledow, Anderson & Becker, 1979), or processes employed in particular decisions (Jacoby, 1977). The latter, as undertaken by Jacoby and others, has the advantage of recognizing that decision making should be seen "as a dynamic ongoing process rather than as a static, cross-sectional event" (Jacoby, et al., 1977, p. 120). Consideration of process, however, has been limited to the manner in which consumers utilize information in particular decisions and has not been extended to information and decision making over time.

In other areas of consumer research, the long-term view has received attention. It is recognized, for example, that the pattern of purchases varies over the life cycle; individuals' consumption behavior will therefore be influenced by where they are in the life cycle (Ghez & Becker, 1975). The lifetime pattern provides a context for the particular purchase; focusing on the latter to the exclusion of the former provides a limited, and possibly distorted, perspective.

The same is true for information. Explaining information acquisition in terms of behavior in a single situation overlooks the fact that the consumer has made numerous other purchases and has learned (and forgotten) large amounts of information over time. Theories of learning and cognitive development have dealt with these issues, but in amore general context (McGuire, 1976). Thus, the purpose of this paper is to look at information acquisition behavior as part of a dynamic process which extends over the consumer's lifetime. That view presupposes a macro, rather than a micro, approach. Instead of focusing on particular consumers or specific situations, the perspective is expanded to deal with consumers as a group over time. As is always the case with aggregation, the detail which goes with individual variations is lost. However, there is a gain in terms of being able to explore the overall determinants of consumers' information acquisition behavior.

THEORETICAL FRAMEWORK

This analysis combines two closely related theoretical developments--human capital and time. The former owes its development to studies of labor force activities, although the relationship to non-market or home production has been noted (Ghez & Becker, 1975). In its simplest statement, investment is made in human capital through educational activities; the cost of these activities is weighed against the return the investment will bring in higher future wages (Ben-Porath, 1967).

Investment in information may be viewed similarly, except that the return is measured in terms of the expected discounted value of the increased flow of services to the consumer. The notion that the cost of information must be considered in terms of the benefits it provides is not new and has been the basis for empirical investigation (Stigler, 1961; Goldman & Johansson, 1978). However, earlier efforts focused on individual purchases and did not account for the accumulation of information over time. That is, the consumer's stock of informational capital was not taken into account.

Analyzing the accumulation of informational capital is more complex than the more general analysis of human capital. With the latter, individuals make specific, identifiable investments in the acquisition of skills and these investments earn a return through higher incomes. In the case of informational capital, a similar process operates only when consumers undertake explicit search (although the return is measured differently). The problem is that information may be accumulated in ways which are not associated with formal search processes.

Educational activities, although they may be focused on some other goal, provide consumers with both specific information and more general training which is needed to function in the marketplace. Education also broadens the consumers' time horizon and makes one aware of both an expanded range of possible actions and the implications of those actions. Other information comes from experience in the marketplace. As they learn about specific products, places to buy and ways to approach the market, consumers accumulate a considerable reservoir of knowledge from which they can draw. However, information may also come from activities which are not related to the individual's own market experience. Consumers learn through talking with friends, observing others, advertising; reading or any of a broad range of possible experiences and associations.

As information is accumulated, it is structured and organized by the individual. In that process, information from a variety of sources may be blended together. For example, consumers learn something about automobiles through explicit search, but that information is combined with what is learned from individual experience, the experiences of friends, the media and other sources. A particular piece of information which the consumer carries into the market is therefore likely to be a compound element and not traceable to a unique source. [Obviously, the question of information processing is relevant to this discussion. More effective processing will result in improvements in both the quantity and quality of the informational stock. The source of the information is important to the extent that information from different sources is likely to be processed differently. A chance remark from a friend, if it is remembered, may prove useful in the market later; however, it is likely that the information will be dismissed as useless and never processed. In different terminology, "bits" of information are accumulated into "chunks;" these chunks (which correspond to the compound elements discussed above) are more useful to the consumer (Simon, 1974). Clearly there are individual differences in this process and all bits of information do not stand an equal chance of making it into a chunk. Having said that, it should also be clear that the argument in this paper is independent of the processing question. The latter is worth exploring, but for the argument here it is sufficient to know that consumers accumulate and recall information not how they do it.]

It should be clear that the consumer's stock of informational capital is not static. It expands as the consumer adds new information and deteriorates (or depreciates) as information is forgotten or becomes obsolete. Assuming that the latter is a continuous process, some new investment in information will be needed to maintain the stock of information. When net investment is positive, the stock of informational capital expands. [The precise nature of the capital accumulation process will depend on the production function for informational capital (Ben-Porath, 1967).]

In a particular encounter with the market, the consumer's stock of information may be adequate to meet informational needs; in that case, there will be no information acquisition. However, if the returns on investment in new information are greater than the costs, the consumer will make that investment. Either way, the outcome is shaped by the existing stock of information and cannot be understood without reference to that stock.

Consider an alternative situation in which the consumer fails to make use of information, even when it is readily available (e.g., nutritional labeling). Such information would be disregarded when the individual feels that he or she already knows enough about nutritional qualities or when the individual lacks the ability to make use of the information. In the first instance, the stock of informational capital is adequate and new investment is unwarranted. In the second, the amount of investment which would be required to make use of the information would not be warranted by the return.

At this point, the cost of information should be examined in more detail. Following Becker, the analysis treats consumption as a process which utilizes both time and goods to produce commodities. It is the commodities which enter the individual's utility function (Becker, 1965). Because time has value and is utilized in consumption, the costs of both the time and goods inputs must be considered to account for the full price of the commodity. [Designating the commodity as Z_i, we have Z_i = f_i(x_i, t_i), where x_i and t_i are goods and time inputs respectively. The full price, which includes the cost of both time and goods is: p = S(p_ib_i + t_iw)Z_i. The terms t_i and b_i express the input of time and goods respectively per unit of Z_i. The price of goods is p_i, and w gives the wage rate or earnings per unit of time. Hence, t_iw becomes an opportunity cost measure of time (Becker, 1965). The proper valuation of time (w) may be difficult for individuals who are not employed in the market.]

Similarly, the time and goods costs associated with acquiring information must be taken into account. These can be incorporated directly into the cost of the commodity. Obtaining information about a purchase requires time for shopping and goods inputs such as transportation, telephone, or buying guides. It is clear that when information costs are high, the cost of the commodity will increase. [There are, however, certain trade offs the consumer can make. For example, more extensive shopping may reveal features about a product which make it less time consuming to use. That is worthwhile if the discounted value of the time saved over the life of the product is greater than the cost of the time expended in search. The consumer's time horizon is relevant her in determining strategy.]

As in the general case, consumers can substitute goods and time inputs in seeking information. Buyers guides may be purchased to help focus the search process. Other goods inputs, transportation and communication, can reduce the time input required. The determination of the precise combination is made according to the relative prices of goods and time. [This suggests that higher-income individuals would substitute for time in the acquisition of information. Higher-income consumers do in fact make the most use of product testing information (Engledow, Anderson & Becker 1979).]

The argument thus far can be summarized by considering a given consumer at a given point in time. As the individual goes into the market, information needs will be determined by the type of purchase and the amount of information the person already has (the stock of informational capital). Additional information will be obtained if the return on the investment is greater than the cost. The former is determined by the discounted value of the flow of services which results from the effort. The latter is set by the cost of the goods and time inputs.

This discussion provides the basis for the development of a formal model of information acquisition. However, the arguments set forth thus far are themselves sufficient for generating the stable hypotheses. Because these hypotheses are worth investigating in their own right and because they will aid in the further specification necessary to develop the model, a preliminary investigation is warranted. The hypotheses are set forth in the following section.

HYPOTHESES

Overview

The preceding section developed the idea of the accumulation of informational capital as a learning process. Therefore, the factors associated with consumer learning should be significant variables. Among these, years of formal education and experience in the marketplace are obviously important. Age may be used as a proxy for the latter. Cost considerations are dominated by the value of the individual's time, which makes income the key consideration. Numerous other aspects could be identified, but in this preliminary inquiry, the focus will be on education, age and income. In each case, the discussion will focus on the variable in question, without reference to the others.

Education

Education has an obvious impact on information capital, but it also bears upon cost considerations. Therefore, no directionality can be assumed. Looking only at the accumulation of informational capital, it is clear that additional information should expand the stock. Because an expanded stock of informational capital should reduce the need for additional investment, there should be an inverse relationship between years of education and the amount of information acquisition.

The returns to investment in information, however, are measured in terms of the expected value of the discounted stream of benefits. Because the measure is expectational, education should have an impact. Individuals with more education will be more aware of both alternatives and the potential benefits from additional search. To the extent that education expands the individual's time horizon, additional search can be expected. Take the example of purchasing an appliance. The person with a shorter time horizon would be less concerned about energy costs over the life of the product and would therefore search less.

Thus, no unambiguous prediction can be made about the impact of education on information acquisition. The accumulation of human capital would discourage search, but expanded expectations would promote additional investment. The outcome therefore depends upon the relative strength of the two factors.

Age

Because age serves as a proxy for experience in the market, older consumers should be more experienced. It follows that they will have accumulated more information through those experiences. As a result, there should be an inverse relationship between age and information acquisition. This assumes a constant rate of depreciation of the capital stock. The depreciation rate may increase for the elderly as it becomes more likely that information is obsolete and that problems will develop with memory. Therefore the prediction is limited to the individual's working years.

Income

It is clear from the discussion above that higher income raises opportunity costs and therefore increases the cost of investment in information. It follows that there should be an inverse relationship between income and information acquisition. However, it is likely that higher-income individuals (regardless of their education) have expanded expectations; as with education, this would tend to expand investment. Furthermore, higher-income consumers buy a wider range of more expensive goods; this too would increase the need for investment in education. Thus, no clear prediction can be made about directionality.

SUMMARY

The preceding sections have outlined a human capital approach to consumer information. The basic premise is that in any purchase situation, the consumer carries some quantity of information obtained from personal experience and learning. That stock of informational capital becomes a dominant factor in the consumer's decision whether or not to seek additional information. New investment in information is warranted when the returns from that effort (measured by the discounted value of the flow of services it generates) is greater than the cost (measured by the goods and time inputs required). However, just as business may increase production without expanding its capital stock, the individual may expand consumption without obtaining additional information.

Although this is a macro view, it can be integrated easily with research efforts. The link to information processing has already been noted. Other research on specific situations can be included by accounting for the consumer's previous experience in a more systematic fashion. The result should be a more comprehensive view of consumers' information acquisition behavior.

In order to focus that view, more refinements are required. The relationships involved, which are laid out here in general fashion, need to be further specified. That effort is underway as part of the development of a formal model. The hypotheses set forth above should also be tested; those tests are also underway, with data based on consumers' time use. Together these efforts should provide added definition to a comprehensive view of consumer information.

REFERENCES

Becker, Gary S. (1965), "A Theory of the Allocation of Time," Economic Journal, 75, 493-517.

Ben-Porath, Yoram (1967), "The Production of Human Capital and the Life Cycle of Earnings," The Journal of Political Economy, August, 217-31.

Engledow, J. L., Anderson, R. D., and Becker, H. (1979), "The Changing Information Seeker," The Journal of Consumer Affairs, 13, 75-85.

Ghez, G. R. and Becker, G. S., (1975), The Allocation of Time and Goods Over the Life Cycle. New York: National Bureau of Economic Research.

Goldman, A. and Johansson, J. K. (1978), "Determinants of Search for Lower Prices: An Empirical Assessment of the Economics of Information Theory," The Journal of Consumer Research, 5, 176-86.

Jacoby, Jack (1977), "The Emerging Behavioral Process Technology in Consumer Decision-Making Research," Advances in Consumer Research, IV, 263-65.

Jacoby, J., Chestnut, R. W., and Silberman, W. (1977), "Consumer Use and Comprehension of Nutrition Information,'' The Journal of Consumer Research, 4, 119-28.

McGuire, William J. (1976), "Some Internal Psychological Factors Influencing Consumer Choice," The Journal of Consumer Research, 2, 302-319.

Nelson, Philip (1970), "Information and Consumer Behavior,'' The Journal of Political Economy, 78, 311-29.

Simon, Herbert (1974), "How Big is a Chunk?" Science, 183, 482-88.

Stigler, George (1961), "The Economics of Information," The Journal of Political Economy, 69, 213-25.

----------------------------------------