George A. Akerlof Research Paper

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American economist George Akerlof received the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 2001. He was awarded this prize jointly with economists Michael Spence and Joseph Stiglitz, for their work on asymmetric information—a situation in which agents in a market have differing levels of information (e.g., regarding the quality of a product). In his seminal paper “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism” (1970), Akerlof demonstrates how asymmetric information is persistent in the market for used cars. In the simplest example, there are two types of cars: a high-quality car with price CH and a “lemon,” or defective car, with price CL. Only the seller is aware of the type of car being sold, whereas the consumer faces significant uncertainty about the quality of the purchase. Given that the probability of receiving a car of high quality is q, where 0 < q < 1, and low quality is 1 – q, the buyer will only be willing to pay the expected value of the car, or q · CH + (1 – q) · CL. As a result, lemons will drive owners of high-quality cars, who have little incentive to sell at the average price, out of the market. Akerlof also suggests that institutions, such as warranties and chain brands, may help circumvent the problem of asymmetric information. Despite critical acclaim for this work, some researchers have criticized Akerlof’s theoretical model for its failure to explain observed empirical patterns.

Akerlof has also made significant contributions to the understanding of efficiency wages—that is, wages set above the market-clearing wage as a way to induce worker efficiency and productivity. In 1967 Akerlof spent a year at the Indian Statistical Institute in New Delhi as a visiting professor. He describes what he learned in India during that time as “the keystone for [my] later contributions to the development of an efficiency wage theory” (2001). Almost twenty years after his return from India, he published “Efficiency Wage Models of the Labor Market” (1986), written with his wife, economist Janet Yellen. This paper explains the motivation behind efficiency wages, which are an oft-cited theoretical explanation for market failures resulting in involuntary unemployment. Akerlof and Yellen show that firms pay efficiency wages because they minimize the labor cost per efficiency unit.

Akerlof was born on June 17, 1940, in New Haven, Connecticut. He attended high school at the Lawrenceville School in Princeton, New Jersey, and in 1958 entered Yale University, where he earned his BA degree. He later attended the Massachusetts Institute of Technology, from which he received a PhD in economics in 1966. He has been a visiting professor at the Indian Statistical Institute (1967–1968) and the Cassel Professor of Money and Banking at the London School of Economics (1978–1980), and has also served as senior economist at the Council of Economic Advisers (1973–1974). Akerlof is currently Koshland Professor of Economics at the University of California, Berkeley.

Bibliography:

  1. Akerlof, George A. 1970. The Market for “Lemons”: Quality Uncertainty and the Market Mechanism. Quarterly Journal of Economics 84 (3): 488–500.
  2. Akerlof, George A. 2001. Autobiography. The Nobel Foundation. http://nobelprize.org/nobel_prizes/economics/ laureates/2001/akerlof-autobio.html.
  3. Akerlof, George A. Curriculum Vitae. University of California, Berkeley Economics Department. http://elsa.berkeley.edu/ ~akerlof/docs/cv.pdf.
  4. Akerlof, George A., and Janet L. Yellen, eds. 1986. Efficiency Wage Models of the Labor Market. Cambridge, U.K., and New York: Cambridge University Press.
  5. Yellen, Janet L. 1984. Efficiency Wage Models of Unemployment. American Economic Review 74 (2): 200–205.

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