U.C. Berkeley professor turns lemons into Nobel Prize

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Anyone who has ever bought a used car with undetected engine or transmission problems has probably had angry thoughts about calling the cops.

The right call, it turns out, should have been to a U.C. Berkeley economics professor whose knowledge of the "lemon" market just netted him a Nobel Prize.

George Akerlof, 61, was jolted out of bed at 6:15 a.m. Wednesday with a phone call informing him he was one of three winners of the 2001 Nobel Prize in Economics. His 1970 paper "The Market for Lemons" was cited by the Royal Swedish Academy of Sciences as a seminal work explaining the economic situation known as "asymmetric information."

The academic essay explored the unlikely world of used-car sales to explain how buyers and sellers possessing varying amounts of information about a product can greatly affect the market.

Akerlof, who has taught at U.C. Berkeley since 1966, was born in New Haven, Conn., the son of a Jewish mother and Swedish father. His wife, Janet Yellen, served on President Clinton's Council of Economic Advisers from 1997 to 1999, and was a member of the Board of Governors of the Federal Reserve System. She is also Jewish, and prior to the couple's move to Washington, D.C., they attended services at Berkeley's Congregation Beth El, where their 20-year-old son, Robert, who is now at Yale, went to preschool. The family now lives in Berkeley.

A specialist in poverty, crime and discrimination, Akerlof points out that his used-car study can be utilized as a model for the examination of other markets, including the health-insurance industry.

"On the average, most people who are rich have medical insurance. A number of people don't, and they tend to be poor," he said. "If you get sick and you don't have medical insurance, your first thought is likely to be, 'I wish I did,' and you'd try to buy it. If the insurance company thinks the only people who are trying to buy insurance are very sick, then they can't afford to sell it."

Since things don't quite work this way, Akerlof said studying the behavior of the market requires more than simply charting supply and demand. The information available to the buyer and seller alters their behavior, and therefore, the market's.

Akerlof — a behavioral economist who integrates the study of anthropology, sociology and psychology into his work — spent a year as a visiting professor at the Indian Statistical Institute in the late 1960s. While abroad, he became keenly interested in the economic differences between developed and underdeveloped countries.

Among other things, industrialized countries are dotted with long-standing institutions, businesses and products that are well known and trusted by buyers; underdeveloped nations, by and large, are not.

"In developed nations, people have much greater trust in products and the market," he said. In other parts of the world, however, market stability is elusive: "If you buy insurance, when you need it, you don't know if the person who sold it to you will be there, and it'll pay off."

Knowledge of asymmetric information can help illustrate how markets stabilize themselves or fail, and can be used to explain varying unemployment levels or even the recent crash of the high-tech industry.

Akerlof will share the honor — and the $943,000 prize — with fellow winners A. Michael Spence of Stanford University and Joseph Stiglitz of Columbia University.

After receiving his early morning phone call, Akerlof initially dismissed the notion of his winning the Nobel Prize as a prank. Less than four hours later in front of a well-attended press conference at U.C. Berkeley's Alumni House, he said, "I guess it isn't."

Since writing his landmark 1970 paper, Akerlof joked that he has only bought one used car, but it was from a student that he knew and trusted. And it wasn't a lemon.

"It was OK," he said with a laugh.

Joe Eskenazi

Joe Eskenazi is the managing editor at Mission Local. He is a former editor-at-large at San Francisco magazine, former columnist at SF Weekly and a former J. staff writer.