Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP Posting-Version: version B 2.10.3 4.3bsd-beta 6/6/85; site l5.uucp Path: utzoo!linus!philabs!prls!amdimage!amdcad!amd!pesnta!greipa!decwrl!sun!l5!laura From: laura@l5.uucp (Laura Creighton) Newsgroups: net.politics.theory Subject: Re: The free market Message-ID: <221@l5.uucp> Date: Sat, 26-Oct-85 20:21:19 EST Article-I.D.: l5.221 Posted: Sat Oct 26 20:21:19 1985 Date-Received: Thu, 31-Oct-85 21:07:54 EST References: <225@gargoyle.UUCP> Reply-To: laura@l5.UUCP (Laura Creighton) Distribution: net Organization: Nebula Consultants in San Francisco Lines: 69 In article <225@gargoyle.UUCP> carnes@gargoyle.UUCP (Richard Carnes) writes: > >"[Akerlof] argued that the seller of a used car knows whether or not >it is a lemon; the buyer has to play the averages, knowing only that >some cars are lemons but not whether the particular car he's buying >is. Wrong-o. The buyer can get an expert opinion from his local mechanic, remember. > Buyers will pay only a price that reflects the average frequency >of lemons in the used-car crop. That average is a high price for a >lemon but understates the worth of the better cars offered on the >market. The owners of the better cars are reluctant to sell at a >price that makes allowance for the lemons that other people are >selling; so the better cars appear less frequently on the market and >the average frequency of lemons increases. Wrong again. The sellers of the good cars will instead come up with a way to demonstrate that they have better than lemon cars. Again, they will get their cars certified by the local mechanic. > As customers learn this, >they make a greater allowance for lemons in the price they're willing >to pay. The cars of average quality in the previous market are now >undervalued and their owners less willing to sell them. The >percentage frequency of lemons continues to rise. In the end, the >market may disappear, although institutional arrangements like >guarantees, or the certification of cars by dealers who exploit a >reputation for good cars, may keep the used-car market alive. What is institutional about the arrangement? > >"Akerlof generalized this model to a number of markets in which there >is unequal information on the two sides -- insurance companies know >less than you do, usually, about whether you are accident prone, or >susceptible to hereditary diseases, or are contemplating suicide. >Life insurance rates for sixty-five-year-olds must allow for a large >fraction who are not long for this world. And those who know they >are healthy and have a family history of longevity and are exposed to >few risks have to pay the same premium as the poorer risks; life >insurance being unattractive at that price, few of them buy it. The >average life expectancy of the customers goes down, the rates go up >further, and the bargain now looks poor even to those of normal life >expenctancy. And so forth." [T. Schelling] But this is only news to those economists who had claimed that there was equal information on both sides. It is particularily ironic that *they* should make this mistake, because economists are primarily in the business of SELLING INFORMATION, and opinions or theories which are their thoughts on information. As a practical matter, insurance companies stay in business. It is even possible to get insurance altered when you can provide good information to the insurance companies that you are a lower risk than the statistical average. (For example, some states and some provinces give (or gave) a lower automobile insurance rate to straight-A high school students than others. Abstainers from alcohol can get a much lower rate on all sorts of insurance.) -- Help beutify the world. I am writing a book called *How To Write Portable C Programs*. Send me anything that you would like to find in such a book when it appears in your bookstores. Get your name mentioned in the credits. Laura Creighton sun!l5!laura (that is ell-five, not fifteen) l5!laura@lll-crg.arpa