- Person
- George Akerlof
- Lived
- b. 1940
- Field
- Economics
- From
- American
The story
George Akerlof was born in New Haven in 1940 to a Swedish-born chemist father and a mother whose parents were both of German Jewish descent; his maternal grandfather, a pioneering cardiologist, was denied tenure at Johns Hopkins because of that ancestry. Akerlof studied at Yale and MIT and joined the University of California, Berkeley, in 1966.
In his first year at Berkeley he wrote “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism”. Its example was the used-car market. Sellers know whether a car is good or a lemon; buyers cannot tell, so they will pay only for average quality. Owners of good cars then withdraw them, average quality falls, buyers lower what they will pay, and more good cars leave. The market can shrink to lemons or disappear, even though buyers and sellers of good cars would both gain from trading. Economists call this adverse selection.
Editors rejected the paper two or three times as too trivial before the Quarterly Journal of Economics published it in 1970. Akerlof showed that the problem reached far beyond cars: it helped explain the very high interest rates charged by village lenders in India, the difficulty older people had buying individual health insurance and discrimination against minorities in hiring. He also argued that many familiar institutions arise to overcome hidden information, including dealers’ guarantees, brand names, chain stores, franchises and licensing.
When Akerlof shared the 2001 Nobel Memorial Prize in Economic Sciences with Michael Spence and Joseph Stiglitz, the Royal Swedish Academy of Sciences called the lemons paper the single most important study in the economics of information. Its logic now runs through consumer protection, insurance regulation and finance: warranties, inspections and disclosure rules give buyers information they would otherwise lack, and insurance rules that pool healthy and sick people together are designed to stop the downward spiral Akerlof described.
Why it matters
Akerlof’s insight explains why warranties, inspections, disclosure rules and insurance regulation are needed, protecting buyers, borrowers and patients when the other side knows more.
About George Akerlof
Economist whose 1970 paper ‘The Market for Lemons’ explained how hidden information can wreck markets, the logic behind warranties, brands and insurance rules. Nobel 2001.
Sources
- Information for the Public: The Prize in Economic Sciences 2001 NobelPrize.org
- George A. Akerlof, Biographical NobelPrize.org
- George Akerlof Wikipedia
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.