George A. Akerlof

Who is George A. Akerlof?

George A. Akerlof is a New Keynesian economist and professor at the University of California Berkeley. Along with Michael Spence and Joseph Stiglitz, he shared the 2001 Nobel Prize in Economics for his theory of information asymmetry as described in his famous 1970 paper, "The Market for Lemons: Quality Uncertainty and the Market Mechanism," which discusses imperfect information in the market for used cars. 

Life and Career

Born in Connecticut in 1940, Akerlof spent his early years in the Pittsburgh area, then Princeton, NJ, following his father's career steps in chemical engineering. After private schooling Akerlof enrolled at Yale. "Regarding college, I had no choice," explained Akerlof in his autobiographical write-up for the Nobel Prize website, because his parents met there and his brother also attended the university. After earning his B.A. from Yale, Akerlof obtained his PhD from MIT. Dr. Akerlof has spent most of his career at the University of California at Berkeley as an economics professor. As of 2020 he is still on the faculty at Berkeley; he also teaches at the McCourt School of Public Policy at Georgetown University. Another interesting fact: he is married to former Fed Chair Janet Yellen, whom he met at the Federal Reserve Board where he was working for a year between a stint at Berkeley and the London School of Economics.

Contributions

Akerlof is most well known for his theory of markets under asymmetric information. As a New Keynesian, Akerlof has written about several aspects of price and wage rigidities that may cause markets not to full clear and potentially contribute to below full employment equilibrium in the macroeconomy. He has also made several contributions extending economic theory to include the impact of social and cultural phenomena. 

Asymmetric Information and the Market for Lemons

Akerlof shared the 2001 prize with fellow MIT greats Spence and Stiglitz for, according to the Nobel Prize committee, "study[ing] markets where sellers of products have more information than buyers about product quality. He showed that low-quality products may squeeze out high-quality products in such markets, and that prices of high-quality products may suffer as a result." This paper formed the basis for the theory of adverse selection in markets with asymmetric information. Where the quality of a good is not easily observable to buyers, they will have to account for some probability that the good offered is of lower quality and will thus offer a lower price, which will perversely drive sellers of high quality goods off the market unless some kind of market mechanism (such as an enforceable warranty) or government policy can assure buyers of the quality of the good. This theory has found many applications such as the market of health insurance and job markets. 

Price and Wage Rigidities

A major topic in New Keynesian economics is the idea that prices and wages are sticky and not full flexible enough to achieve rapid clearing of marketes implied in neoclassical models and related macroeconomic theories. Along with his wife, Janet Yellen, Akerlof developed the idea that firms do not instantaneously adjust prices to continuously reflect costs and other relevant information, but instead follow rules of thumb in pricing and set price points. He is also well known for his efficiency wage hypothesis, which suggests that wages are determined by the efficiency goals of employers to retain the most skilled workers and economize on training or retraining costs by laying off some workers when demand falls rather than uniformly cutting wages for all workers. Akerlof and others argue that these kind of price and wage rigidities can be economically efficient for the individual market participants, but across the entire economy can lead to significant unemployment and losses to overall social welfare.

Social Economics

More recently, Akerlof has written in several areas where the influence of social and cultural phenomena intersect with the implications fo economic theory. In several article he’s has argued that the widespread acceptance and use of contraceptive drugs and abortion have increased rather than decreased out-of-wedlock births and undesired pregnancies because they have radically changed sexual norms and behaviors by both men and women. In a 2000 article and his 2010 book, Identity Economics, he argued that peoples’ preferences over their social identities matters for their economic behavior just as much as the relevant prices and quantities of economic goods. Lastly, he has argued that such social norms about how people think they should behave influences not just outcomes in specific markets but aggregate macroeconomic outcomes. This also connects his earlier work on wage and price rigidities to his work on social economics and the general research program of New Keynesian economics.