Riskbank Award Winners - Economics
-If there is one thing you need to know about the Riksbank Prize in Economics in 2001, you need to know that it was the year of the BIG A.S.S.
That’s right, George Akerlof, Michael Spence, and Joseph Stiglitz
I personally feel that they got the short end of the stick,
- because the research of the 2 winners in 1996 were based off these 3 gentlemen’s life’s work, and they didn’t receive the award until some 5 years later.
Grudges aside, the 3 men’s work was in the development of the field of Asymmetric Information
Let me ask you a question… What do you get when you buy a bad used car?________ that’s right, a lemon. This theory was first represented in an essay “The Market for Lemons” by the godfather… George Akerlof.
- Within this essay many issues were addressed, but, one prevalent point was declared; and that is, due to asymmetrical information, there is an adverse selection market practices.
o All this means is that in the market, one party has “more” or “better” information on one side of the transaction, than the “uninformed” party on the other.
If both parties were risk adverse, then both parties would come about in a mutually profitable outcome. But, come on….. When is there ever a situation where both parties are ALWAYS 100% OPEN AND FACT REVEALING ABOUT EVERY SINGLE DETAIL IN A TRANSACTION? - Especially Used cars.
Taking the classic used car example: Here, the issue would be that the car seller, typically a private seller and not a dealership (which is an important difference for regulation), would knowingly sell a (low quality) car with problems to a customer who otherwise is led to believe the vehicle has a valuation of a product with high quality.
If markets are not regulated with the distinction between high quality and low quality products, consequentially, the market would become flooded with low-quality sellers who...
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