Twan points to a nice slate/FT article on the market for lemons:
In 1966 an assistant economics professor, George Akerlof, tried to explain why this is so in a working paper called "The Market for 'Lemons.' " His basic insight was simple: If somebody who has plenty of experience driving a particular car is keen to sell it to you, why should you be so keen to buy it?
Akerlof showed that insight could have dramatic consequences. Buyers' perfectly sensible fears of being ripped off could, in principle, wipe out the entire used-car market: There would be no price that a rational seller would offer that was low enough to make the sale. The deeper the discount, the more the buyer would be sure that the car was a terrible lemon.
This whole area of lemons is sometimes called markets in asymmetric information - as the seller of the car has the information that you the buyer doesn't. Of course, asymmetries can go both ways, and sometimes you have the information whereas the other guy, the seller, does not. What's up with that?
Well, it means that you won't be able to get a good deal, either. This is the market in insurance, as described in the article, and also the market in taxation. These areas were covered by Mirlees in 1970, and Rothschild & Stiglitz in 1976. For sake of differentiation, as sometimes these details matter, I call this the market for limes.
But there is one final space. What happens when neither party knows the good they are buying?
Our gut reaction might be that these markets can't exist, but Michael Spence says they do. His example was the market for education, specifically degrees. In his 1973 paper entitled "Job Market Signalling" he described how the market for education and jobs was stable in the presence of signals that had no bearing on what the nominal goal was. That is, if the market believed a degree in arts was necessary for a job, then that's what they looked for. Likewise, and he covers this, if the market believed that being male was needed for a job, then that belief was also stable - something that cuts right to the core of our beliefs, because such a belief is indeed generally irrelevant but stable, whether we like it or not.
This one I term the Market for Silver Bullets, a term of art in the computing field for a product that is believed to solve everything. I came to this conclusion after researching the market for security, and discovering that security is a good in Spence's space, not in Akerlof's nor Rothschild and Stiglitz's spaces. That is, security is not in the market for lemons nor limes - it's in the tasteless spot in the bottom right hand.
Yup, because it is economics, we must have a two by two diagram:
|The Market for Goods,|
as described by Information
and by Party
Michael Spence coined and explored the sense of signals as being proxies for the information that parties were seeking. In his model, a degree was a signal, that may or may not reveal something of use. But it's a signal because we all agree that we want it.
Unfortunately, many people - both economists and people outside the field - have conflated all these markets and thus been lead down the garden path in their search for fruit. Spence's market in silver bullets is not the same thing as Akerlof's market in lemons. The former has signals, the latter does not. The latter has institutions, the former does not. To get the full picture here we need to actually do some hard work like read the original source papers mentioned above (Akerlof and Spence aren't so bad, but Rothschild & Stiglitz were tougher. I've not yet tried Mirrlees, and I got bogged down in Vickery. All of these require a trip to the library, as they are well-pre-net papers.)
In particular, and I expand on this in a working draft paper, the bitter-sweet truth is that the market for security is a market for silver bullets. This has profound implications for security research. But for those, you'll have to read the paper :)Posted by iang at May 14, 2006 04:32 PM | TrackBack