Analysis of market asymmetries

By Louis Uchitelle

NEW YORK, OCT 11. Three U.S. economists have been awarded the Nobel Prize in Economic Science for pioneering research in the shortcomings and imperfections in the market mechanism. This year's winners - Dr. Joseph E. Stiglitz, Dr. George A. Akerlof and Dr. A. Michael Spence - did their research in the 1960s and 1970s which incorporated "imperfect information" into economics: a concept at odds with the mainstream view that markets are all- knowing and self-correcting.

``The three of them pioneered the view that markets, when confronted with imperfections, may not be the best way to allocate resources,'' said Dr. Alan Krueger, a Princeton University economist. ``That changed economics.'' The Nobel citation calling Dr. Stiglitz's work the broadest of the three, said, ``Joseph Stiglitz's many contributions have transformed the way economists think about the working of markets. Together with the fundamental contributions by George Akerlof and Michael Spence, they make up the core of the modern economics of information.''

Their research convinced all three that government must play a strong role in a market system to prevent damage from imperfect information. Mr. Stiglitz, 58, and Dr. Akerlof, 61, were often mentioned as likely Nobel winners, for work that germinated when they were graduate students together, obtaining their Ph.D's in economics at the Massachusetts Institute of Technology in the late 1960s.

At a news conference at Columbia on Wednesday, Dr. Stiglitz, a former chief economist at the World Bank and now professor at the Columbia University, reiterated that view. Financial markets, he said, offering one example, run on information, and without the Securities and Exchange Commission to enforce full disclosure, people would find themselves purchasing corporate stock without sufficient knowledge to determine a proper value. Management - and perhaps others selling the stock - might know of serious shortcomings that were hidden from buyers. If that ``asymmetry'' happened often enough, stock trading could break down. ``One part of the market knows more than another,'' he said, ``and in a sense imperfect or asymmetric information is at the heart of our work.'' Just as imperfect information justifies government intervention, so does it explain various corporate strategies.

Dr. Stiglitz joined the Columbia faculty in July from Stanford, where he had been a professor since 1988. In the 1990s he was chairman of President Bill Clinton's Council of Economic Advisers and chief economist at the World Bank. Dr. Stiglitz also relied on his research to challenge traditional International Monetary Fund (IMF) practices that led, he concluded, to unnecessary economic trauma during the Asian financial collapse of the late 1990s. Because of his repeated criticism of the IMF, Dr. Stiglitz found himself forced from his World Bank job last year. But he has not let up. ``There were terrible results in Asia,'' Dr. Stiglitz said at his news conference. ``The IMF is only now changing its view.''

Used cars and warranties

Dr. Akerlof of the University of California at Berkeley was honoured mainly for a 1970 essay, ``The Market for Lemons,'' which the Nobel committee described as ``the single most important study in the literature on economics of information.'' Dr. Akerlof's insight came out of his observation that nearly every used-car buyer worries whether he or she is overpaying for a defective vehicle.

The used-car dealer knows its status but the buyer lacks this information, and too many bad experiences can disrupt the used- car market. The advent of lemon laws helped to prevent this.

Dr. Spence, 58, of Stanford University, holds a doctorate in economics from Harvard University, but has not practiced his profession since 1984, when he became dean of the School of Arts and Sciences at Harvard, and in 1990, dean of Stanford's business school.

The Nobel award came mainly on the strength of a single paper that Dr. Spence published in 1973 describing ``market signals.'' In the pure model of a free market, consumers are presumed to have perfect knowledge, able to accurately tell the differences in quality among, say, various models of refrigerators.

Prices would automatically reflect that understanding. But most consumers lack this information, so sellers intervene, offering comprehensive warranties, for example, to signal high quality. ``If a seller gave a fancy warranty on a product that broke down a lot,'' Dr. Spence said, ``he could go broke.'' - New York Times

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