Economics brief: six big ideas.
Information asymmetry: Secrets and agents
George Akerlof's 1970 paper, “The Market for Lemons”, is a foundation stone of information economics, the first in our series on seminal economic ideas.
In 2007 the state of Washington introduced a new rule aimed at making the labour market fairer: firms were banned from checking job applicants' credit scores.
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 1970, 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.
In the labour market, for example, the textbooks mostly assumed that employers know the productivity of their workers—or potential workers—and, thanks to competition, pay them for exactly the value of what they produce.
You might think that research upending that conclusion would immediately be celebrated as an important breakthrough.
Yet when, in the late 1960s, George Akerlof wrote “The Market for Lemons”, which did just that, and later won its author a Nobel prize, the paper was rejected by three leading journals.
At the time, Mr Akerlof was an assistant professor at the University of California, Berkeley; he had only completed his PhD, at MIT, in 1966.
Perhaps as a result, the American Economic Review thought his paper's insights trivial.
The Review of Economic Studies agreed.
The Journal of Political Economy had almost the opposite concern: it could not stomach the paper's implications.
Mr Akerlof, now an emeritus professor at Berkeley and married to Janet Yellen, the chairman of the Federal Reserve, recalls the editor's complaint: “If this is correct, economics would be different.”
In a way, the editors were all right.
Mr Akerlof's idea, eventually published in the Quarterly Journal of Economics in 1970, was at once simple and revolutionary.
Suppose buyers in the used-car market value good cars— “peaches” —at $1,000, and sellers at slightly less.
假設，二手車市場中的買方給好車—— “桃子” ——估價1000美元，賣方要稍微少一點。
A malfunctioning used car—a “lemon” —is worth only $500 to buyers (and, again, slightly less to sellers) .
一輛瑕疵二手車—— “檸檬”，對買方而言，只值500美元 (而且對賣方來說，又要稍微少一點)。
If buyers can tell lemons and peaches apart, trade in both will flourish.
In reality, buyers might struggle to tell the difference: scratches can be touched up, engine problems left undisclosed, even odometers tampered with.
To account for the risk that a car is a lemon, buyers cut their offers.
They might be willing to pay, say, $750 for a car they perceive as having an even chance of being a lemon or a peach.
But dealers who know for sure they have a peach will reject such an offer.
As a result, the buyers face “adverse selection” : the only sellers who will be prepared to accept $750 will be those who know they are offloading a lemon.
結果，買方面臨 “逆向選擇” : 唯一準備接受750美元的賣家將是知道自己正在脫手檸檬的人。
Smart buyers can foresee this problem.
Knowing they will only ever be sold a lemon, they offer only $500.
Sellers of lemons end up with the same price as they would have done were there no ambiguity.
But peaches stay in the garage.
This is a tragedy: there are buyers who would happily pay the asking-price for a peach, if only they could be sure of the car's quality.
This “information asymmetry” between buyers and sellers kills the market.
買賣雙方之間的這種 “信息不對稱” 殺死了市場。
Is it really true that you can win a Nobel prize just for observing that some people in markets know more than others?
That was the question one journalist asked of Michael Spence, who, along with Mr Akerlof and Joseph Stiglitz, was a joint recipient of the 2001 Nobel award for their work on information asymmetry.
His incredulity was understandable.
The lemons paper was not even an accurate description of the used-car market: clearly not every used car sold is a dud.
And insurers had long recognised that their customers might be the best judges of what risks they faced, and that those keenest to buy insurance were probably the riskiest bets.
Yet the idea was new to mainstream economists, who quickly realised that it made many of their models redundant.
Further breakthroughs soon followed, as researchers examined how the asymmetry problem could be solved.
Mr Spence's flagship contribution was a 1973 paper called “Job Market Signalling” that looked at the labour market.
斯彭斯的主要貢獻是1973年的一篇名為 “就業市場信號行為” 的考察勞動力市場的論文。
Employers may struggle to tell which job candidates are best.
Mr Spence showed that top workers might signal their talents to firms by collecting gongs, like college degrees.
Crucially, this only works if the signal is credible: if low-productivity workers found it easy to get a degree, then they could masquerade as clever types.
This idea turns conventional wisdom on its head.
Education is usually thought to benefit society by making workers more productive.
If it is merely a signal of talent, the returns to investment in education flow to the students, who earn a higher wage at the expense of the less able, and perhaps to universities, but not to society at large.
One disciple of the idea, Bryan Caplan of George Mason University, is currently penning a book entitled “The Case Against Education”.
(Mr Spence himself regrets that others took his theory as a literal description of the world. )
Signalling helps explain what happened when Washington and those other states stopped firms from obtaining job-applicants' credit scores.
Credit history is a credible signal: it is hard to fake, and, presumably, those with good credit scores are more likely to make good employees than those who default on their debts.
Messrs Clifford and Shoag found that when firms could no longer access credit scores, they put more weight on other signals, like education and experience.
Because these are rarer among disadvantaged groups, it became harder, not easier, for them to convince employers of their worth.