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Akerlof's essay'The Market for Lemons' - Book Report/Review Example

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Akerlof's essay'The Market for Lemons'

Everyone can observe that this is a most important contribution to economics.
Undoubtedly, Akerlof is asserting that his paper has something to say regarding an amazingly wide range of fact in the real world. In the case of the labor market, he appears to be promising to elucidate a number of features of the real world. However in the case of business in underdeveloped countries, he is merely intended for giving structure to a statement that is often made regarding the real world. At this point, the insinuation appears to be that Akerlof's model will one way or another reformulate an empirical proposition which is usually believed to be true.
Akerlof then says that, although his theory has these very general applications, he will focus on the market for used cars: "The automobile market is used as a finger exercise to illustrate and develop these thoughts. It should be emphasized that this market is chosen for its concreteness and ease in understanding rather than for its importance or realism" (Akerlof, George, 1970)
On first reading, it is tempting to interpret "the automobile market" as the market in which real people buy and sell real cars, and to think that Akerlof is going to present some kind of case-study. One can see why he might focus on one particular market which is easy to understand, even if that market is not very important on the scale of the economy as a whole. But then what does Akerlof mean when he says that this market is not realistic The object of a case-study may be unrepresentative, but it cannot be unrealistic. To make sense of this passage, we have to recognize that it marks a transition between the real world and the world of models. Akerlof is using the real automobile market as an example. But what he is going to present is not an empirical case study; it is a model of the automobile market. Although it is the real market which may be unimportant, it is the model which may be unrealistic.
Akerlof moves straight on to the central section of his paper, section II, entitled "The Model with Automobiles as an Example." The transition from reality to model is made again at the very beginning of this section:
The example of used cars captures the essence of the problem. From time to time one hears either mention of or surprise at the large price difference between new cars and those which have just left the showroom. The usual lunch table justification for this phenomenon is the pure joy of owning a "new" car. We offer a different explanation. Suppose (for the sake of clarity rather than realism) that there are just four kinds of cars. There are new cars and used cars. There are good cars and bad cars. (Akerlof, George, 1970)
The first four sentences are about an observed property of the real world: there is a large price difference between new cars and almost-new ones. Akerlof suggests that, at least from the viewpoint of the lunch table, this observation is difficult to explain. If we assume that Akerlof takes lunch with other economists, the implication is that economics cannot easily explain it; the "pure joy" hypothesis sounds like an ad hoc stratagem to rescue conventional price theory. So far, then, the mode of argument might be Popperian: there is a received theory which makes certain predictions about market prices; observations of ...Show more


Akerlof's 1970 paper "The market for lemons" is one of the well-known papers in academic economics. It is in general seen as having initiated to economics the concept of asymmetric information, and in doing so; flashing off what is now an entire branch of economics: the economics of information…
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Akerlofs essayThe Market for Lemons essay example
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