Nobel prize winners

Alfred Nobel life

• pioneering scientist, inventor, philanthropist

• invented dynamite

• wanted to invest 5 nobel prizes in his will

  • physics, chem, literature, peace, eventually economics

  • a prize awarded for inspiring an outpouring of research and creating new fields of study

Typical characteristics of a nobel laureate

• strong math background

• related to laissez faire or govt int

• ideas that change how we think about econ issues and can affect govt policies

George stigler life and work

• studies uni of chicago

• professor at uni of columbia

• Economics of information

• won prize in 1982

  • for his studies of industrial structures, functioning of markets, and causes and effects of public regulation

• helped form the US govt measure of poverty

Stigler’s thoughts on policy

traditionally: no govt int even to curb monopoly power or ensure consumer protection

argued that regulation benefits companies under govt control = govt failure

over-regulation can hinder comp counteracting any benefits from it

Stigler’s relation to other economists

• Robinson: saw that similar goods were selling for different prices

  • not between customers but between vendors

• Smith: Extended Smith’s work by incorporating information in price formation

• Chicago school: they agreed that there should be limited govt int while recognizing role of info in market dynamics

  • not even to limit monopoly power

  • not to guarantee consumer safety

  • regulation benefits companies under govt control

  • there is a possibility of govt failure

• Akerlof: he built on Stigler’s theory economic of information

Stigler’s theory of value

struggling with the idea that identical products sell at different prices

• this was an inconsistency between real-world and comp economic model

• he was a firm believer of comp model so he believed that the cost of acquiring info was the cause of this

  • diminishing returns to information

  • MC of acquiring new info increases

• information is an economic good —> economics of information

• higher information costs = greater price discrepancies

• this theory only works if there is perfect info abt MB and MC of information

George Akerlof life and work

• Yale and MIT

• professor at uni of California

• Witnessed great depression

• Asymmetric information

• The market for lemons

• efficiency wage model of the labor market

• won for studies in asymmetric information spence and Stiglitz in 2001

Akerlof theory on information

• perfect info in info is not available = markets are still efficient

• asymmetric info —> one party has more info than the other

  • this causes market inefficiencies

• adverse selection in car market, insurance market and borrowing money

Akerlof relation to other economists

• Smith: free markets lead to efficient outcomes but Akerlof added that they don’t under asymmetric information

  • agreed that wages may differ due to noneconomic reasons

  • Akerlof added that some firms pay efficiency wages to increase profitability

Akerlof’s efficiency wage theory

Wages are rigid —> in great depression, wages were not cut instead mass unemployment

• if firms paid more than avg wage, workers worked better and were more loyal

  • firms decided to keep wages bcs cutting them would demotivate workers

• frictional unemployment occurs due to efficiency wages and need to exist for efficiency wages to work

  • it is persistent compared to ppl thinking it is temporary

  • labor markets DONT clear like goods markets

Stigler and Akerlof relevance

• imperfect info is everywhere

• nowadays there are many arrangement to reduce info asymmetry

• many intermediaries provide more info

• inexpensive access to info provided by internet reduces asymmetric info