Message-ID: <8298337.1075862453312.JavaMail.evans@thyme> Date: Mon, 22 Oct 2001 06:07:48 -0700 (PDT) From: j.kaminski@enron.com To: bob.lee@enron.com Subject: FW: Newsletter Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable X-From: Kaminski, Vince J X-To: Lee, Bob X-cc: X-bcc: X-Folder: \VKAMINS (Non-Privileged)\Kaminski, Vince J\Sent Items X-Origin: Kaminski-V X-FileName: VKAMINS (Non-Privileged).pst -----Original Message----- From: =09VKaminski@aol.com@ENRON =20 Sent:=09Sunday, October 21, 2001 5:16 PM To:=09vkamins@enron.com Cc:=09scrensh@enron.com Subject:=09Newsletter TheMarket for Lemons and the Price of Dishonesty=20 The Nobel Memorial Prize in Economics was awarded thisyear to three economi= sts: George Akerlof, Joseph Stiglitz and Michael Spence,who made significan= t contributions to modeling markets with information asymmetry.In many case= s in a given market sellers or buyers may have exclusiveinformation that is= not available to the counter party. The best-known examplecomes from the [= paper by Akerlof, The Market for "Lemons": QualityUncertainty and the Marke= t Mechanism, Quarterly Journal of Economics, 84,(1970), pages 488-500. =20 An owner of a used car can form a good idea of the qualityof his vehicle. H= e has much better information if his car is a lemon. As bothgood and bad us= ed car have to sell at the same price - it is impossible for anaverage buye= r to distinguish between good and bad merchandise - they sellers ofgood use= d cars are driven out of the market. Most traded used cars will belemons. O= f course, there are ways to mitigate the problem: an owner of a goodused ca= r may send signal to the buyer by offering him a guarantee or absorbingthe = cost of inspection.=20 Hiring is a similardecision. As Michael Spence wrote in his paper Job Marke= t Signaling,Quarterly Journal of Economics, 87, (1973), pages 355 - 374, to= hire somebodyis frequently to purchase a lottery ticket. The employer cann= ot directlyobserve the productivity of a potential hire. "What he does obse= rve is aplethora of personal data in the form of observable characteristics= andattributes of the individual, and it is these that must ultimately dete= rminehis assessment of the lottery he is buying." The observable characteri= stics of an individual may be immutable (raceand, generally, sex) but in so= me cases certain attributes are alterable. A candidatecan modify such chara= cteristics as education and job history. Some economistssay, tongue-in-chee= k, that some candidates who attended top schools and spentmany painful hour= s studying useless subjects signal their willingness to dowhatever it takes= to succeed. Another way to send a signal about one's qualityis to find a j= ob with a top firm at the beginning of one's career and tosucceed in this f= irm before moving on. This provides a useful lesson to anybodywho plans to = be in the labor market at some points in his or her life: thereputation of = the current employer is critical to future employmentopportunities and shou= ld be defended at any cost. Honesty, at the end of theday, is an imperative= dictated as much by morality as by one's self interest. =20 - The Market for Lemons and the Price of Dishonesty.doc=20 - The Market for Lemons and the Price of Dishonesty.doc