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NOBEL PRIZE for economics 2001
 Markets
with asymmetric information
George A. Akerlof (photo) University of California at Berkeley,
USA,
A. Michael Spence Stanford University, USA,
Joseph E. Stiglitz Columbia University, USA
Many markets are characterized by asymmetric information:
actors on one side of the market have much better information
than those on the other. Borrowers know more than lenders
about their repayment prospects, managers and boards know
more than shareholders about the firm's profitability, and
prospective clients know more than insurance companies about
their accident risk. During the 1970s, this year's Laureates
laid the foundation for a general theory of markets with asymmetric
information. Applications have been abundant, ranging from
traditional agricultural markets to modern financial markets.
The Laureates' contributions form the core of modern information
economics.
George Akerlof demonstrated how a market where sellers
have more information than buyers about product quality can
contract into an adverse selection of low-quality products.
He also pointed out that informational problems are commonplace
and important. Akerlof's pioneering contribution thus showed
how asymmetric information of borrowers and lenders may explain
skyrocketing borrowing rates on local Third World markets;
but it also dealt with the difficulties for the elderly to
find individual medical insurance and with labour-market discrimination
of minorities.
Michael Spence identified an important form of adjustment
by individual market participants, where the better informed
take costly actions in an attempt to improve on their market
outcome by credibly transmitting information to the poorly
informed. Spence showed when such signaling will actually
work. While his own research emphasized education as a productivity
signal in job markets, subsequent research has suggested many
other applications, e.g., how firms may use dividends to signal
their profitability to agents in the stock market.
Joseph Stiglitz clarified the opposite type of market
adjustment, where poorly informed agents extract information
from the better informed, such as the screening performed
by insurance companies dividing customers into risk classes
by offering a menu of contracts where higher deductibles can
be exchanged for significantly lower premiums. In a number
of contributions about different markets, Stiglitz has shown
that asymmetric information can provide the key to understanding
many observed market phenomena, including unemployment and
credit rationing.
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