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Nobel Prize winner: Stgler/Akerlof part 2 (Today's impact (Nowadays,…
Nobel Prize winner: Stgler/Akerlof part 2
Stigler introduced economics of information, but if information is limited, markets are still inefficient.
Akerlof:
Asymmetric information
One party has more information than another --> market inefficiency
The Market for Lemons:
Adverse selection
Also applies to borrowing money or buying insurance
Asymmetric information about car quality
Akerlof: asymmetric info
Relation to Smith:
Free markets lead to efficient outcomes
Akerlof: not if information is imperfect
Efficiency wage theory
Great Depression: cutting wages, continued rise in unemployment
Akerlof:
People are more productive, when they are paid more
Easier to attract high quality (new) workers
Efficiency wage theory
Explain frictional unemployment
More valuable (current) workers
Explain wage rigidity
Relation to Smith:
Wages may differ as to reflect noneconomic (dis)advantages
Akerlof: some firms pay higher than market-clearing wages to reduce shirking and labor turnover, and to increase profitability
Wages paid linked to worker’s productivity
Today's impact
Nowadays, many arrangements to reduce information asymmetries
..
Product warranties, franchising, establishments of brand names
Many intermediaries provide information...
Travel guides, brokers, etc.
Imperfect information is everywhere
Restaurant meals, motel rooms, physician services, electronic equipments,
labor markets
And finally, inexpensive access to information provides through internet reduces asymmetric information problem