George Akerlof was awarded the Nobel Prize in economics for his work on the second hand car market. He observed how asymmetrical information between buyers and sellers affected the market price of second hand cars and with that the number of sales made. If a used car has been well valeted, prospective buyers will be unable to tell the difference between a badly kept car and one that had been kept well by its previous owners. As a result the buyer will offer a low price and the owner of the quality used car might not chose to sell. A market for good cars and a market for lemons would be the most efficient outcome - but without perfect information this is unlikely to be our reality.
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Two giants in this area were ludwig von mises and friedrich hayek , who predicted that socialism would fail because central planners could not possibly have the information they needed to plan an economy.
One of the next steps in relaxing the perfect-information assumption was to assume, realistically, that one side of a market has better information than the other.
That is what all three of the Nobel Prize winners did. If buyers could tell which cars are lemons and which are not, there would be two separate markets: a market for lemons and a market for high-quality cars.
But there is often asymmetric information: buyers cannot tell which cars are lemons, but, of course, sellers know.
Therefore, a buyer knows that there is some probability that the car he buys will be a lemon and is willing to pay less than he would pay if he were certain that he was buying a high-quality car. This lower price for all used cars discourages sellers of high-quality cars. Although some would be willing to sell their own cars at the price that buyers of high-quality used cars would be willing to pay, they are not willing to sell at the lower price that reflects the risk that the buyer may end up with a lemon.
Thus, exchanges that could benefit both buyer and seller fail to take place and efficiency is lost. Akerlof did not conclude that the lemon problem necessarily implies a role for government. Also, the sellers who are willing to offer the warranty are those who are confident that they are not selling a lemon.
Akerlof also went beyond cars and showed that the same kind of issues arise in credit markets and health insurance markets, to name two. Akerlof, along with coauthor Janet Yellen, also did some of the pioneering work in new keynesian economics. They considered the case of firms with market power that follow a rule of thumb on pricing. The rule of thumb they considered was that firms do not increase price when demand increases and do not reduce price when demand falls.
They also showed, however, that if many firms followed this strategy, the effect on the overall economy was substantial.
This lack of adjustment of prices, they noted, would mean that increases in money-supply growth see Money Supply would increase the growth of real output, and short-run drops in money-supply growth would reduce the growth of real output. More recently, Akerlof has tried to explain the persistence of high poverty rates and high crime rates among black Americans.
He and coauthor Rachel Kranton argue that many black people face a choice between going along with the mainstream culture and succeeding economically or acting in opposition to that culture and sabotaging themselves. The incentives are high, they argue, for doing the latter. Akerlof earned his B. For most of his professional life, he has been an economics professor at the University of California at Berkeley.
In —, he was a senior economist with President Richard M. George A. Akerlof
Market Failure and Akerlof’s Lemons
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The Market for Lemons
Campaigners celebrated the new law as a step towards equality—an applicant with a low credit score is much more likely to be poor, black or young. Since then, ten other states have followed suit. But when Robert Clifford and Daniel Shoag, two economists, recently studied the bans, they found that the laws left blacks and the young with fewer jobs, not more. Before , economists would not have found much in their discipline to help them mull this puzzle. Indeed, they did not think very hard about the role of information at all.
George A. Akerlof
The lemons problem refers to issues that arise regarding the value of an investment or product due to asymmetric information possessed by the buyer and the seller. Akerlof, an economist and professor at the University of California, Berkeley. The tag phrase identifying the problem came from the example of used cars Akerlof used to illustrate the concept of asymmetric information , as defective used cars are commonly referred to as lemons. The lemons problem exists in the marketplace for both consumer and business products, and also in the arena of investing, related to the disparity in the perceived value of an investment between buyers and sellers.
Two giants in this area were ludwig von mises and friedrich hayek , who predicted that socialism would fail because central planners could not possibly have the information they needed to plan an economy. One of the next steps in relaxing the perfect-information assumption was to assume, realistically, that one side of a market has better information than the other. That is what all three of the Nobel Prize winners did. If buyers could tell which cars are lemons and which are not, there would be two separate markets: a market for lemons and a market for high-quality cars.