Lemon Markets
People blame Economists for their use of jargon even when expressing simple ideas. But nobody can blame us for lacking sense of humor when naming such ideas!
Lemon Markets is one good example. Believe me, the fruit market is not enough to award Prof. Stiglitz a Nobel Price in Economics. Instead, Prof. Stiglitz named Lemon Markets after those in which goods are apparently identical goods though they are not and (2) there information is asymmetric.
Think about used cars.
You can't tell the difference between two Silver 2005 Honda's parked in a store. Although used Honda's look all alike, anyone knows that a Honda driven by a retired Grandma is far more desirable than a Honda which had been driven by a 16yo as his first car. Still, in the store, they look the same. Therefore, the dealer must sell both by the same price.
Information is asymmetric because the seller knows what he is selling. But the buyer has no idea that one Honda belonged to Aunt May and the other to, say, Johnny.
Prof. Stiglitz has found that this type of market leads people like Aunt May not to sell her Honda. This happens because the price paid by the buyer for May's Honda is the same as Johnny's. But Aunt May knows her Honda is underpriced. She won't sell it for the price of the boy's who-knows-what-he-did-in-the-backseat-car. On the other hand, Johnny is quite sure his car is quite overpriced.
In a few years, there will be left only those carelessly driven Honda's in any used-car store.
And the same works for Ph.D. candidates. The funding institution cannot tell assess skills of different candidates applying for funding. They all look alike. They all have straight A's, outstanding GRE's, speak French and play sax. But they are aware they are not as homogeneous as one can expect from bottles of Coke. Some have taken non-accredited courses in Nuclear Physics, others have cheated in Crayon 101. None of these reach the academic records, available to the sponsor. Thus, whenever the funding institution lowers the stipend, the good guys quit.
And that is why Economists have named this type of markets Lemon Market: in the end, there are only lemons asking for funding. Grandma will give her old Honda to her grandson's 16yo birthday. But she won't sell it. Smart guys go sell themselves somewhere else. There are always companies eager for the Nuclear Physics aficionado. And the market end up full of Johnny's Honda's and Crayon 101 cheaters.
Of course, funding institutions can always make themselves some lemonade out of Crayon 101 cheating guys! But I am quite sure Harvard or Cambridge were not built out of lemons.
Important Note: Economic Theory has also found out that there are other reasons that motivate people to work rather than money. And that explains why there are still quite a lot of good people researching for fifteen hundred bucks! Like me, may I add!
Lemon Markets is one good example. Believe me, the fruit market is not enough to award Prof. Stiglitz a Nobel Price in Economics. Instead, Prof. Stiglitz named Lemon Markets after those in which goods are apparently identical goods though they are not and (2) there information is asymmetric.
Think about used cars.
You can't tell the difference between two Silver 2005 Honda's parked in a store. Although used Honda's look all alike, anyone knows that a Honda driven by a retired Grandma is far more desirable than a Honda which had been driven by a 16yo as his first car. Still, in the store, they look the same. Therefore, the dealer must sell both by the same price.
Information is asymmetric because the seller knows what he is selling. But the buyer has no idea that one Honda belonged to Aunt May and the other to, say, Johnny.
Prof. Stiglitz has found that this type of market leads people like Aunt May not to sell her Honda. This happens because the price paid by the buyer for May's Honda is the same as Johnny's. But Aunt May knows her Honda is underpriced. She won't sell it for the price of the boy's who-knows-what-he-did-in-the-backseat-car. On the other hand, Johnny is quite sure his car is quite overpriced.
In a few years, there will be left only those carelessly driven Honda's in any used-car store.
And the same works for Ph.D. candidates. The funding institution cannot tell assess skills of different candidates applying for funding. They all look alike. They all have straight A's, outstanding GRE's, speak French and play sax. But they are aware they are not as homogeneous as one can expect from bottles of Coke. Some have taken non-accredited courses in Nuclear Physics, others have cheated in Crayon 101. None of these reach the academic records, available to the sponsor. Thus, whenever the funding institution lowers the stipend, the good guys quit.
And that is why Economists have named this type of markets Lemon Market: in the end, there are only lemons asking for funding. Grandma will give her old Honda to her grandson's 16yo birthday. But she won't sell it. Smart guys go sell themselves somewhere else. There are always companies eager for the Nuclear Physics aficionado. And the market end up full of Johnny's Honda's and Crayon 101 cheaters.
Of course, funding institutions can always make themselves some lemonade out of Crayon 101 cheating guys! But I am quite sure Harvard or Cambridge were not built out of lemons.
Important Note: Economic Theory has also found out that there are other reasons that motivate people to work rather than money. And that explains why there are still quite a lot of good people researching for fifteen hundred bucks! Like me, may I add!
posted by fmgoto at 8:01 AM
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