TheMarket for Lemons and the Price of Dishonesty=20 The Nobel Memorial Prize in Economics was awarded thisyear to three economi= sts: George Akerlof, Joseph Stiglitz and Michael Spence,who made significan= t contributions to modeling markets with information asymmetry.In many case= s in a given market sellers or buyers may have exclusiveinformation that is=  not available to the counter party.
The best-known examplecomes from the [= paper by Akerlof, The Market for "Lemons": QualityUncertainty and the Marke= t Mechanism, Quarterly Journal of Economics, 84,(1970), pages 488-500.
=20 An owner of a used car can form a good idea of the qualityof his vehicle.
H= e has much better information if his car is a lemon.
As bothgood and bad us= ed car have to sell at the same price - it is impossible for anaverage buye= r to distinguish between good and bad merchandise - they sellers ofgood use= d cars are driven out of the market.
Most traded used cars will belemons.
O= f course, there are ways to mitigate the problem: an owner of a goodused ca= r may send signal to the buyer by offering him a guarantee or absorbingthe = cost of inspection.=20 Hiring is a similardecision.
As Michael Spence wrote in his paper Job Marke= t Signaling,Quarterly Journal of Economics, 87, (1973), pages 355 - 374, to=  hire somebodyis frequently to purchase a lottery ticket.
The employer cann= ot directlyobserve the productivity of a potential hire.
"What he does obse= rve is aplethora of personal data in the form of observable characteristics=  andattributes of the individual, and it is these that must ultimately dete= rminehis assessment of the lottery he is buying."
The observable characteri= stics of an individual may be immutable (raceand, generally, sex) but in so= me cases certain attributes are alterable.
A candidatecan modify such chara= cteristics as education and job history.
Some economistssay, tongue-in-chee= k, that some candidates who attended top schools and spentmany painful hour= s studying useless subjects signal their willingness to dowhatever it takes=  to succeed.
Another way to send a signal about one's qualityis to find a j= ob with a top firm at the beginning of one's career and tosucceed in this f= irm before moving on.
This provides a useful lesson to anybodywho plans to = be in the labor market at some points in his or her life: thereputation of = the current employer is critical to future employmentopportunities and shou= ld be defended at any cost.
Honesty, at the end of theday, is an imperative=  dictated as much by morality as by one's self interest.
=20   - The Market for Lemons and the Price of Dishonesty.doc=20  - The Market for Lemons and the Price of Dishonesty.doc

Newsletter
TheMarket for Lemons and the Price of Dishonesty=<NUMBER> The Nobel Memorial Prize in Economics was awarded thisyear to three economi= sts: George Akerlof, Joseph Stiglitz and Michael Spence,who made significan= t contributions to modeling markets with information asymmetry.In many case= s in a given market sellers or buyers may have exclusiveinformation that is= not available to the counter party.
The best-known examplecomes from the [= paper by Akerlof, The Market for "Lemons": QualityUncertainty and the Marke= t Mechanism, Quarterly Journal of Economics, <NUMBER>,(<NUMBER>), pages <NUMBER>-<NUMBER>.
=<NUMBER> An owner of a used car can form a good idea of the qualityof his vehicle.
H= e has much better information if his car is a lemon.
As bothgood and bad us= ed car have to sell at the same price - it is impossible for anaverage buye= r to distinguish between good and bad merchandise - they sellers ofgood use= d cars are driven out of the market.
Most traded used cars will belemons.
O= f course, there are ways to mitigate the problem: an owner of a goodused ca= r may send signal to the buyer by offering him a guarantee or absorbingthe = cost of inspection.=<NUMBER> Hiring is a similardecision.
As Michael Spence wrote in his paper Job Marke= t Signaling,Quarterly Journal of Economics, <NUMBER>, (<NUMBER>), pages <NUMBER> - <NUMBER>, to= hire somebodyis frequently to purchase a lottery ticket.
The employer cann= ot directlyobserve the productivity of a potential hire.
"What he does obse= rve is aplethora of personal data in the form of observable characteristics= andattributes of the individual, and it is these that must ultimately dete= rminehis assessment of the lottery he is buying."
The observable characteri= stics of an individual may be immutable (raceand, generally, sex) but in so= me cases certain attributes are alterable.
A candidatecan modify such chara= cteristics as education and job history.
Some economistssay, tongue-in-chee= k, that some candidates who attended top schools and spentmany painful hour= s studying useless subjects signal their willingness to dowhatever it takes= to succeed.
Another way to send a signal about one's qualityis to find a j= ob with a top firm at the beginning of one's career and tosucceed in this f= irm before moving on.
This provides a useful lesson to anybodywho plans to = be in the labor market at some points in his or her life: thereputation of = the current employer is critical to future employmentopportunities and shou= ld be defended at any cost.
Honesty, at the end of theday, is an imperative= dictated as much by morality as by one's self interest.
=<NUMBER> - The Market for Lemons and the Price of Dishonesty.doc=<NUMBER> - The Market for Lemons and the Price of Dishonesty.doc
dowhatever lottery ticket employer life thereputation current raceand generally sex stics individual immutable signal qualityis painful hour studying lemons price dishonesty spence significan contributions