George Akerloff has a Nobel Prize in economics. He shared it in 2001 with Joseph Stiglitz and Michael Spence for his work on imperfect information. His seminal paper on the subject, "The Market for Lemons: Quality Uncertainty and the Market Mechanism" (1970) took the used car market as an example where the lack of reliable product information meant that lemons could be sold for more than they were worth to people who would assume their quality was average (lacking any basis to know better), whereas cherries could not get the price they were worth, so they tended not to be on the market. As Wikipedia notes, the initial reception of Akerlof's paper was not enthusiastic at first, though that changed over time:
Both the American Economic Review and The Review of Economic Studies rejected the paper for "triviality", while the reviewers for Journal of Political Economy rejected it as incorrect, arguing that if this paper was correct, then no goods could be traded. Only on the 4th attempt did the paper get published in Quarterly Journal of Economics.[2] Today, the paper is one of the most-cited papers in modern economic theory (more than 5,800 citations in academic papers as of July 2009).
It's possible that Akerlof could earn a second Nobel Prize for work he'd only just begun when he got his first one, although his co-author, Rachel Kranton, should have pride of place for this one, since she first had to convince Akerloff himself that there was something there that needed attention. This work involves the integration of a key concept from the social sciences--identity--with one of the key strategies of micro-economics--game theory. Conventional micro-economics takes the view that people are rational decisionmakers, maximizing utility with respect to their preferred tastes. Over the last two decades behavioral economics has attacked this model by discovering all sorts of behavior that doesn't fit the simplified model of rationality that micro-economists use. For example, people don't equally value losing or gaining a dollar, even though the model says that they should. But Kranton and Akerlof have developed models that explains some of this "irrational" behavior--including, I would argue, the fact that sometimes only economists and their students act the way that "economic man" is supposed to.
They've written four technical papers on the subject over the past decade, and in February they published a book Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being. Here's what the publisher's blurb has to say:
In 1995, economist Rachel Kranton wrote future Nobel Prize-winner George Akerlof a letter insisting that his most recent paper was wrong. Identity, she argued, was the missing element that would help to explain why people--facing the same economic circumstances--would make different choices. This was the beginning of a fourteen-year collaboration--and of Identity Economics.
Identity economics is a new way to understand people's decisions--at work, at school, and at home. With it, we can better appreciate why incentives like stock options work or don't; why some schools succeed and others don't; why some cities and towns don't invest in their futures--and much, much more.
Identity Economics bridges a critical gap in the social sciences. It brings identity and norms to economics. People's notions of what is proper, and what is forbidden, and for whom, are fundamental to how hard they work, and how they learn, spend, and save. Thus people's identity--their conception of who they are, and of who they choose to be--may be the most important factor affecting their economic lives. And the limits placed by society on people's identity can also be crucial determinants of their economic well-being.
|
