[FOUNTAIN]Learning how to not pick a lemonOriginating in the Himalayas, the lemon is a pretty fruit with a refreshing aroma. But in English, the word “lemon” is also used to refer to a defective automobile.
In economics, the word comes up in explaining the asymmetry of information. In his 1970 paper “The Market for Lemons,” Professor George Akerlof of the University of California at Berkeley attempted to analyze the correlation between the asymmetry of information and the market. A founder of the asymmetric information theory, he was awarded the Nobel Prize for economic science in 2001 for his contribution to the field.
Asymmetric information happens when one side has ample information on a subject while the other does not. Mr. Akerlof uses the used car market as an example. The seller of a used car knows its defects, while the buyer does not have the same information. Therefore, he might pay a much higher price for a vehicle that appears to be in good condition but is a lemon.
Because of this, prices for used cars tend to be lower in the market. Owners of quality used cars might not want to put their vehicles on the market but rather try to sell them through acquaintances. As a result, the used car market might be left with substandard products. Asymmetric information could lead to a phenomenon called “adverse selection.”
Until the 1960s, Italian insurance companies offered a product for chastity, which compensated parents whose daughters lost their virginity while studying abroad. However, the companies had to abolish the policy after heavy losses after a few years, since only those with a high probability of receiving payment bought the product.
Jeong Chan-yong, the senior secretary to the president for personnel affairs, recently announced that the government was planning not to require information on the academic backgrounds of candidates applying for civil service positions. The purpose is to select competent people regardless of their background. But it is not clear how the government would pick out talented individuals without considering their academic background, and the plan poses a concern for the negative effect of adverse selection. Economists say that adverse selection can only be prevented when both sides share as much relevant information as possible, but our society seems to be going backward.
by Lee Se-jung
The writer is an editorial writer for the JoongAng Ilbo.
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