The rhino population has been decimated by the growing demand for their horns and the concomitant rise in poaching. A recent proposal to save the rhinos that has engendered heated debates among conservationists is the development of synthetic horns--produced in labs using the latest scientific and technological advances--that serve as substitutes for the real horns.
Proponents of this approach argue that the production of fake horns that are engineered to be biologically indistinguishable from real horns--and available at a much lower price--would decrease the demand for the natural product and thus reduce the population pressure on the rhinos. Those who are against using faux horns as a conservation tool, including the groups Save the Rhino International and the International Rhino Foundation, contend that the sale of synthetic substitutes would have the exact opposite effect of raising the demand for natural horns.
Neither side of this debate, however, has accounted for a fundamental economic phenomenon known as 'adverse selection' that can arise in markets when a product comes in different quality levels. And neglecting this phenomenon leads to the wrong conclusion about the usefulness of synthetic horns to reduce rhino poaching. To save the rhinos, we should not develop fake horns that are just like the real thing, which is what some biotech companies like Pembient are trying to do; rather, we should develop fake horns that are far inferior to the real thing.
To understand what adverse selection is and why it is important, consider a buyer who is interested in purchasing, say, a used Prius and finds a seller who has a 2012 model that looks to be in pristine condition for sale. If the buyer is not a car expert and does not know anything about the history of the car, would it be wise for the buyer to assume that the car is in great shape and go ahead and pay the full Kelley Blue Book value that the seller is asking? The short answer, of course, is, no. Perhaps this buyer remembers that Hurricane Sandy struck the country in 2012; that there were companies that bought cars damaged by floodwater from the storm, made cosmetic changes to them, and resold them without revealing their flood-damaged status. Maybe this is one of those cars. Even if it is not, it may have some major problems that the seller is hiding. The smart thing to do would be to spend some money to have the car checked out first, to walk away and keep looking, or to offer the seller a lower price commensurate with the buyer's uncertainty about the quality of the car.
The reason the economist George Akerlof was awarded the Nobel Prize in economics is his insight that, if the buyer cannot ascertain the quality of the used car and is thus unwilling to pay the full value of a car in tip-top shape, then the seller of such a car would not want to make a sale. Hence, transactions involving high-quality used cars would not take place. The buyers' lack of information about product quality would drive out the high-quality products, leaving only the 'lemons' in the market. That, in a nutshell, is adverse selection--we end up with a bad selection of products for sale.
The problem of adverse selection is not restricted to used cars; it can arise in any market in which sellers know more about the product than the buyers. And economists generally dislike adverse selection, for its occurrence indicates that there are market transactions that are beneficial to both buyers and sellers that are not taking place.
But what is bad in the context of used cars is exactly the sort of strategy conservationists can employ to save the rhinos. What Akerlof's insight tells us is that if buyer uncertainty regarding product quality can reduce the number of transactions in the used car market through adverse selection, then it can do the same thing in the market for rhino horns.
What would adverse selection look like in the rhino horn market and how would this benefit the rhinos? This is where the synthetic horns come into play. First, to create buyer uncertainty regarding product quality in the horn market, the synthetic product has to be difficult for the average buyer to distinguish from the real McCoy. Second, to have products of differing quality levels in the market, the synthetic horns should be engineered to be substantially inferior in some aspect so that buyers would place a significantly lower value on the fake horns compared to the real ones--i.e., the fake horns should be developed to be the 'lemons' in the horn market.
This second point bears further elaboration. Because some people believe erroneously that rhino horns have medicinal benefits, there are synthetic horn advocates who argue that the fakes should be engineered to be biochemically equivalent to the real horns so that buyers would view the synthetic and the natural products as being interchangeable for one another. While it follows from straightforward economic logic that the availability of such synthetic substitutes at low price would reduce the supply of real horns, the amount of real horns sold would drop even more if the fakes are made to be significantly inferior to the real ones.
If fakes that are as good as the natural horns are introduced into the market, there would be no reason for buyers to change what they are willing to pay for horns, even if they cannot spot the fakes. But if buyers know that the fakes coming into the market are undesirable in some respects, then their inability to distinguish the fakes from the real ones should cause them to lower the amount of money they are willing to pay to acquire horns. This effect would reduce the supply of real horns more, compared to the case in which the fakes are perfect replicas of the natural horns. And the decrease in people's willingness-to-pay for horns, if large enough, can drive the suppliers of the more costly real horns out of the market--Hello, adverse selection. This, of course, would reduce the incentive for poaching.
Humans, being the ingenious and entrepreneurial species that we are, have found different ways for avoiding the adverse selection problem in markets. After all, high-quality used cars do get sold. This means that, even if fake horns that buyers deem undesirable but are difficult to distinguish from real ones are developed and introduced into the market, people may still find ways to solve the adverse selection problem and sell real horns. If that were to happen, would that make fake rhino horns an ineffective conservation tool? Not at all. The problem of adverse selection ultimately stems from uncertainty about product quality, and avoiding the problem requires some way of acquiring information to remove that uncertainty. Acquiring that information will not be costless--someone has to invest some form of resource for that information. So even if participants in the rhino horn market were able to avoid the adverse selection problem, the presence of the fakes would nevertheless make it costlier to acquire real horns, which would reduce the demand for them. And that would still be a good thing for the rhinos.