tag:blogger.com,1999:blog-7557651362769702661.post4642847259450091188..comments2024-02-20T12:42:49.383+05:30Comments on Ugly, but Bearable: Match-fixing and the Market for LemonsAnonymoushttp://www.blogger.com/profile/13798639260026686429noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-7557651362769702661.post-71917572047648666542010-09-05T20:50:37.966+05:302010-09-05T20:50:37.966+05:30well actually the first draft of the paper had som...well actually the first draft of the paper had some pretty heavy math in it; akerlof's advisor urged him to reduce this because he feared most people would not understand it or misunderstand it (I'll come back to this). <br /><br />The result? A first attempt at submission was rejected with the main problem being that the idea was "obvious". <br /><br />The problem with having a lot of mathematics is that most people will not, or cannot, take the time to really understand the idea behind it. The problem with having too little is that you risk being dismissed as being "obvious". <br /><br />Incidentally, it was while Akerlof was in ISI, Delhi that he got the main insight into the issue: (from the Nobel web site)<br /> <br />"<i>Here Akerlof introduces the first formal analysis of markets with the informational problem known as adverse selection. He analyses a market for a good where the seller has more information than the buyer regarding the quality of the product. This is exemplified by the market for used cars; "a lemon" – a colloquialism for a defective old car – is now a well-known metaphor in economists' theoretical vocabulary. Akerlof shows that hypothetically, the information problem can either cause an entire market to collapse or contract it into an adverse selection of low-quality products.<br /><br />Akerlof also pointed to the prevalence and importance of similar information asymmetries, especially in developing economies. One of his illustrative examples of adverse selection is drawn from credit markets in India in the 1960s, where local lenders charged interest rates that were twice as high as the rates in large cities. However, a middleman who borrows money in town and then lends it in the countryside, but does not know the borrowers' creditworthiness, risks attracting borrowers with poor repayment prospects, thereby becoming liable to heavy losses. Other examples in Akerlof's article include difficulties for the elderly to acquire individual health insurance and discrimination of minorities on the labor market.<br /><br />A key insight in his "lemons paper" is that economic agents may have strong incentives to offset the adverse effects of information problems on market efficiency. Akerlof argues that many market institutions may be regarded as emerging from attempts to resolve problems due to asymmetric information. One such example is guarantees from car dealers; others include brands, chain stores, franchising and different types of contracts.</i>"khttps://www.blogger.com/profile/10083241735659476266noreply@blogger.comtag:blogger.com,1999:blog-7557651362769702661.post-374632426968716092010-09-05T01:55:19.957+05:302010-09-05T01:55:19.957+05:30Incidentally, if I remember the Akerlof paper corr...Incidentally, if I remember the Akerlof paper correctly, he didn't set out too many assumptions on whether all buyers were homogenous or what the exact decision-making method they used to arrive at their price was, which allows for people to understand the broad logic more easily. If he was writing in the late 80's perhaps he would have had to be more explicitly mathematical, which in turn would have required simplifying assumptions and a further departure from reality. And then maybe economists would have missed the wisdom even more completely and ended up fighting over whether the model specifications are true and if under the EMH there could ever be such uncertainty since a market-determined price would contain all information neededAnonymoushttps://www.blogger.com/profile/13798639260026686429noreply@blogger.comtag:blogger.com,1999:blog-7557651362769702661.post-59496553180608868262010-09-05T01:25:18.318+05:302010-09-05T01:25:18.318+05:30Point noted. Think of it in terms of this - the re...Point noted. Think of it in terms of this - the reason why buyers in the first place are unsure of the appropriate price is because they have seen a few instances of lemons on the market but don't know how many such lemons there are. But that gets resolved somewhat by the fact that besides a lot of individual sellers, there are used car dealers that aggregate the used cars and provide some sort of guarantee on the quality of the cars they sell - the buyers would reason that for dealers to survive in the market, they need to weed out at least the worst lemons. That way they get more customers and those customers are willing to pay a higher price given higher confidence in the quality of the vehicle. Of course this confidence may be misplaced since now the dealer may be able to use his brand to slip in a few lemons. This may be some of what Akerlof may be getting at. <br />Applying the same logic to cricket, weeding out some cheats would make fans more willing to trust the remaining players. <br /><br />Good thing I didn't explain this in the post- at least this way I get a comment :-)Anonymoushttps://www.blogger.com/profile/13798639260026686429noreply@blogger.comtag:blogger.com,1999:blog-7557651362769702661.post-27169116188407279912010-09-04T20:28:16.935+05:302010-09-04T20:28:16.935+05:30"Life bans for cheaters would signal that tho..."Life bans for cheaters would signal that those who are left are quite probably honest which means that the events that are being bet upon aren't fixed and are instead decided by a combination of honest effort and chance."<br /><br />how does this link to the lemons problem?<br /><br />actually, the point of the lemons article is somewhat missed by a lot of people. This is that what akerlof was really putting forth the following argument:<br /><br />"by my (rather clever) analysis, a second hand market shouldn't exist.<br /><br />yet it does. why/how?"<br /><br />the suggestion from him was to look into the institution underlying the second hand market for cars, to see how they solved this information problem. <br /><br />of course, economists, with their love for cleverness over wisdom, marveled at the method of proof. Not the more interesting, and deeper, suggestion of figuring out how the real world works..<br /><br />i'm not making this up; a co-author of akerlof took an intro micro class for us and told us the above.khttps://www.blogger.com/profile/10083241735659476266noreply@blogger.com