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Enron Mail |
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
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