Boston University and The Market for Lemons
In his pathbreaking paper that is the single most important study in the literature on Economics of Information, "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism" (Quarterly Journal of Economics, 84(3), pp. 488-500), George Akerlof discusses information asymmetry - when agents on one side of the market (sellers) have much better information than those on the other side (buyers).
Akerlof received the Nobel Prize in Economics in 2001 jointly with Joseph Stiglitz and Michael Spence "for their analyses of markets with asymmetric information". He showed that informational asymmetries can give rise to adverse selection on markets. Due to imperfect information on the part of lenders or car buyers, borrowers with weak repayment prospects or sellers of low-quality cars crowd out everyone else from the market (because high interest rates kept for defaulters and low market price of 'lemons' - defective cars would drive out those who pay back on time and those who sell quality cars) - the bad drives away the good. He points out that hypothetically, the information problem can either cause an entire market to collapse or contract it into an adverse selection of low-quality products.
Read this for more details. Let me site an example.
Milk in India in the 1970s.:- In India in the 1970s, good quality milk was rarely available, because so many vendors watered their milk to increase their profits. Since buyers could not assess the milk’s butterfat content, they were rather not willing to pay for the high-priced milk, thereby driving out the high-quality milk from market. Later the Indian National Dairy Development Board provided means to measure butterfat content and created brand to build buyers' trust in the milk they were buying. As a result, the quality of milk available in India improved.
Since 2001, those who are interested even in the 'e' of economics understand the importance of the flow of information, as well as the economic cost the 'economic agents' incur due to assymetric information in market. So when Boston University, which has offered me admission in their masters program in Economics, starting from fall 2007, refused to disclose the past 5 years placement data of their graduates, it came as a surprise to me. Moreover, I was further amazed to see the extent of ignorance, which I would interpret as gross irresponsibility on part of faculty members, about the economics of their own department. They don't seem to have any idea the 'value' of their graduates! What are they doing with those microscopes in their hand? They'll talk about the biology of cells for hours. But if you ask, "which animal is that, whose cells you are examining?", they stare blankly at you.
Akerlof received the Nobel Prize in Economics in 2001 jointly with Joseph Stiglitz and Michael Spence "for their analyses of markets with asymmetric information". He showed that informational asymmetries can give rise to adverse selection on markets. Due to imperfect information on the part of lenders or car buyers, borrowers with weak repayment prospects or sellers of low-quality cars crowd out everyone else from the market (because high interest rates kept for defaulters and low market price of 'lemons' - defective cars would drive out those who pay back on time and those who sell quality cars) - the bad drives away the good. He points out that hypothetically, the information problem can either cause an entire market to collapse or contract it into an adverse selection of low-quality products.
Read this for more details. Let me site an example.
Milk in India in the 1970s.:- In India in the 1970s, good quality milk was rarely available, because so many vendors watered their milk to increase their profits. Since buyers could not assess the milk’s butterfat content, they were rather not willing to pay for the high-priced milk, thereby driving out the high-quality milk from market. Later the Indian National Dairy Development Board provided means to measure butterfat content and created brand to build buyers' trust in the milk they were buying. As a result, the quality of milk available in India improved.
Since 2001, those who are interested even in the 'e' of economics understand the importance of the flow of information, as well as the economic cost the 'economic agents' incur due to assymetric information in market. So when Boston University, which has offered me admission in their masters program in Economics, starting from fall 2007, refused to disclose the past 5 years placement data of their graduates, it came as a surprise to me. Moreover, I was further amazed to see the extent of ignorance, which I would interpret as gross irresponsibility on part of faculty members, about the economics of their own department. They don't seem to have any idea the 'value' of their graduates! What are they doing with those microscopes in their hand? They'll talk about the biology of cells for hours. But if you ask, "which animal is that, whose cells you are examining?", they stare blankly at you.
posted by Abhishek* at 2:54 AM
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