On pp. 10–11 of this issue of ECONOMIC REVIEW, John Aldrich highlights the life of George A. Akerlof, who was a recipient of the Nobel Prize for economics in 2001 for his work on asymmetric information. This work was embodied in a famous paper from 1970 entitled ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’. In this article, I will discuss the key insights offered by Akerlof’s pioneering work.
Economists see prices in a market economy as signals guiding the economy to an efficient overall allocation of resources. If prices are to act in this way, it is important that traders (whether buyers or sellers) have good information about prices — and about the quality of the goods on offer. Information enables markets to operate effectively. Indeed, economists usually assume when setting up the basic model of perfect competition that all traders in the market have perfect information about trading conditions in the market.
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