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Συντάχθηκε απο τον/την Χρήστος Μπούμπουλης (Christos Boumpoulis)   
Κυριακή, 06 Ιούλιος 2014 05:27
Kovacs-special-1968.jpg

The Market for Lemons

"The Market for Lemons: Quality Uncertainty and the Market Mechanism" is a 1970 paper by the economist George Akerlof. It discusses information asymmetry, which occurs when the seller knows more about a product than the buyer. A lemon is an American slang term for a car that is found to be defective only after it has been bought. Akerlof, Michael Spence, and Joseph Stiglitz jointly received the Nobel Memorial Prize in Economic Sciences in 2001 for their research related to asymmetric information. Akerlof's paper uses the market for used cars as an example of the problem of quality uncertainty. It concludes that owners of good cars will not place their cars on the used car market. This is sometimes summarized as "the bad driving out the good" in the market.

Thesis

Akerlof's paper uses the market for used cars as an example of the problem of quality uncertainty. A used car is one in which ownership is transferred from one person to another, after a period of use by its first owner and its inevitable wear and tear. There are good used cars ("cherries") and defective used cars ("lemons"), ally as a consequence of several not-always-traceable variables, such as the owner's driving style, quality and frequency of maintenance, and accident history. Because many important mechanical parts and other elements are hidden from view and not easily accessible for inspection, the buyer of a car does not know beforehand whether it is a cherry or a lemon. So the buyer's best guess for a given car is that the car is of average quality; accordingly, he/she will be willing to pay for it only the price of a car of known average quality. This means that the owner of a carefully maintained, never-abused, good used car will be unable to get a high enough price to make selling that car worthwhile.

Therefore, owners of good cars will not place their cars on the used car market. The withdrawal of good cars reduces the average quality of cars on the market, causing buyers to revise downward their expectations for any given car. This, in turn, motivates the owners of moderately good cars not to sell, and so on. The result is that a market in which there is asymmetric information with respect to quality shows characteristics similar to those described by Gresham's Law: the bad drives out the good. (Although Gresham's principle applies more specifically to exchange rates, modified analogies can be drawn.)

Asymmetric information

The paper by Akerlof describes how the interaction between quality heterogeneity and asymmetric information can lead to the disappearance of a market where guarantees are indefinite. In this model, as quality is undistinguishable beforehand by the buyer (due to the asymmetry of information), incentives exist for the seller to pass off low-quality goods as higher-quality ones. The buyer, however, takes this incentive into consideration, and takes the quality of the goods to be uncertain. Only the average quality of the goods will be considered, which in turn will have the side effect that goods that are above average in terms of quality will be driven out of the market. This mechanism is repeated until a no-trade equilibrium is reached.

As a consequence of the mechanism described in this paper, markets may fail to exist altogether in certain situations involving quality uncertainty. Examples given in Akerlof's paper include the market for used cars, the dearth of formal credit markets in developing countries, and the difficulties that the elderly encounter in buying health insurance. However, not all players in a given market will follow the same rules or have the same aptitude of assessing quality. So there will always be a distinct advantage for some vendors to offer low-quality goods to the less-informed segment of a market that, on the whole, appears to be of reasonable quality and have reasonable guarantees of certainty. This is part of the basis for the idiom buyer beware.

This is likely the basis for the idiom that an informed consumer is a better consumer. An example of this might be the subjective quality of fine food and wine. Individual consumers know best what they prefer to eat, and quality is almost always assessed in fine establishments by smell and taste before they pay. That is, if a customer in a fine establishment orders a lobster and the meat is not fresh, he can send the lobster back to the kitchen and refuse to pay for it. However, a definition of 'highest quality' for food eludes providers. Thus, a large variety of better-quality and higher-priced restaurants are supported. [wiki]


The problem of asymmetric information rests in the roots of many major problems of our societies.

Average citizens, allover the world, have been used in dealing with their everyday duties while being fortified behind sets of rules. Their common urge is the avoidance of undertaking personal responsibility, namely, they try to become personally involved, as less as possible.

The German mathematician Kurt Friedrich Gödel by his theorem “On Formally Undecidable Propositions of 'Principia Mathematica' and Related Systems”, he proved, for any computable axiomatic system that is powerful enough to describe the arithmetic of the natural numbers (e.g. the Peano axioms or Zermelo-Fraenkel set theory with the axiom of choice), that:

  1. If the system is consistent, it cannot be complete.

  2. The consistency of the axioms cannot be proven within the system.

This means that within our collections of common rules; within our legislation; and within our customs, traditions and cultures, there are, always, areas of undecidabilities, namely, there are always true propositions which is impossible to become proved – within the 'vocabulary' of the given set of rules - as true.

The average citizens cannot cope with the problem of strongly negative misinformation when this misinformation is related with rules' (cultures', etc.) undecidabilities. The reason for this is that, the negative outcome (which is related with the negative misinformation) is going to be balanced by the probability that the negative eventuality might become realized, while, this probability is indeterminate. Therefore, the mathematical hope, of the outcome of each and every alternative choice, can not become known. In such occasions, the personal responsibilities averse citizens, naturally, always back up, and for this reason, quality is always marginalized within the societies, the organization of which is, primarily, rule-based. In extreme cases, those societies can become, literary, devastated even if they just become threatened by false rumors about a carefully selected “lemon”.

Rules are mostly general. This means that, in every day life, rules should be particularized in each and every specific realistic case. And naturally, every particularization involves, up to a certain degree, interpretation of the corresponding rules.

Interpreting the rules is mostly productive, provided that there is no “Ego” (selfishness). But this is not the case with an average citizen, and for this reason the collective effectiveness and the collective morality tend to decrease. And this vulnerability of the “rules” is consistent with the facts that:

  1. Rules are means and not ends.

  2. Effective usage of rules is a consequence and not a goal.

Therefore, by organizing a society primarily upon sets of rules, we establish those dynamics which are going to marginalize quality and demoralize the society.

According to quantum physics, our world is consisted exclusively by relationships; there is nothing else within our world except relationships.

By realizing and acknowledging that our societies are primarily consisted by human relationships we may gain most of the necessary insight for organizing our societies humanely.

If people within a society are connected to each other no more than any pile of random material, then, within this society people might violate even the most fundamental human rights; people might violate even the most fundamental rules of justice; people might marginalize what is best within their society, without even realizing it.

For having quality playing a productive role, within our societies, while the whole society enjoys, peace, freedom, friendship and frugal prosperity, we should assure that the personal relationships are primarily what grant cohesion within all the parts of society, as, among other things, true personal relationships, naturally, dilute the “Ego”.

Therefore, the problems of:

  • creatively exploiting society's “quality”

  • maintain collective efficiency and morality

seems that they are causally connected with:

  • the freedom to establish rational and harmonious personal relationships with those we like, and

  • the freedom to express our creative individuality.

If I understand correctly the history of our human kind, hierarchies have been “fruitful” only in the sort run. Instead, for sustainable enjoyment of the goods of civilization we need, primarily, true personal relationships; and nothing less.



P.S.: This article is dedicated to the victims of slandering.

Note: the photo was found here.


Τελευταία Ενημέρωση στις Κυριακή, 06 Ιούλιος 2014 06:01