Goldman Professor George Akerlof Wins Nobel Prize in Economic Sciences By Genevieve Shiffrar October 11, 2001

Economics Professor George Akerlof began Wednesday morning with a start: at 6:15 a.m. the telephone rang with a caller from Sweden carrying the news. He is a co-winner of the Nobel Prize in economic sciences.

At a press conference four hours later, Professor Akerlof described himself as still in a state of disbelief. Scanning the crowd of photographers and reporters, he surmised it must be true. Yes, he is the second recipient of the prize in two years for the Department of Economics in the College of Letters & Science; the fourth in the Department; the 18th for UC Berkeley.

Dr. Akerlof, the L&S Richard and Rhoda Goldman Distinguished Professor of Social Sciences, will share the award, officially known as the 2001 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, with two other economists: A. Michael Spence of Stanford University and Joseph Stiglitz of Columbia University.

Celebrating the award, from left to right, is Dean Paul Licht, Chair of the Deans in the College of Letters & Science; Alan Auerbach, Chair of the Economics Department; Janet Yellen, wife of Dr. Akerlof and Professor of Business Administration and Economics; Nobelist George Akerlof; Daniel McFadden, Professor of Economics and winner of a Nobel Prize last year; and Chancellor Robert Berdahl.

The Nobel Foundation recognized these scientists for their independent work in developing an understanding of markets with asymmetric information. These are markets in which participants have different amounts of information: when buyers have more information than sellers or vice versa. For example in insurance markets, a person shopping for insurance knows more about his or her preexisting health conditions than an insurance company. In financial investments, a board of directors knows more about the profitability of its company than its investors. These nobelists' work has wide ranging application, such as employment contracts, agricultural markets, and modern financial markets—anywhere buyers and sellers have different information.

In 1966-67, during his first year as a faculty member at Berkeley, Professor Akerlof wrote a ground-breaking paper, "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism." He essentially defined the phenomenon of asymmetric information, exploring ways in which the used car market malfunctions. In this market, sellers know much more about the car under consideration than the potential buyers. The sellers also are much more familiar with the process of selling a used car. Buyers know much less and to avoid the chance of purchasing a "lemon," they tend not to pay the actual value of a used car they would otherwise pay for a reliable vehicle.

Akerlof says the used car market was an excellent base from which to study the effects of asymmetric information because purchasing or selling a used car is a common experience. Accordingly, it was easier for him to see the larger issues, including the way in which markets form or collapse. Since then, many other economists (including the Nobel co-winners) have examined how the basic ideas—such as markets being more robust when buyers and sellers have the same access to information—apply to other situations as well.

Professor Akerlof is interested in a wide array of economic issues and approaches, and is especially known for his interdisciplinary perspective. According to Henry Aaron, a senior fellow at the Brookings Institution, "More than any other person in economics, George has worked to show how the insights from sociology and psychology could broaden, enrich, and increase the power of economics. He is, in my opinion, perhaps the most imaginative and creative applier of insights from other disciplines."

In the Economics Department, he is well known not only for his dedication to the discipline, but also to other economists and his students. Alan Auerbach, Chair of the department, described his dedication to teaching. In the 1990s, Professor Akerlof's wife, Janet Yellen, the Eugene E. and Catherine M. Trefethen Professor of Business Administration and Professor of Economics, served under President Clinton as the Chair of the President's Council of Economic Advisors. During that time, Dr. Akerlof shuttled between Washington, D.C. and Berkeley to teach his classes.

At the press conference, Dr. Akerlof emphasized the collaborative nature of his profession, highlighting his appreciation that in the Economics Department "everybody listens to everybody else." This environment may help to account for the Department's extraordinary success in now claiming fourNobel Prizes. The three past recipients are Daniel McFadden, professor of economics, who shared it last year for his work in econometrics; John Harsanyi, professor of economics and business administration (now deceased), who in 1994 shared it for his work in game theory; and Gerard Debreu, emeritus professor of economics and mathematics, who won the award in 1983 for providing mathematical models to the theory of supply and demand.

When Dr. Akerlof was appointed the Richard and Rhoda Goldman Distinguished Professor in the Social Sciences, he spoke of his dedication to his students and his discipline. He said, "...Teaching shall always come first because that is passing on to the next generation what we already know. I shall not only do my best to teach my students what I know, but more importantly to listen to them so that they can develop their own knowledge and their own ways of thinking ... I shall also do my best as Goldman Professor to make my own research, if successful, be innovative (at least a little different from the standard mold), helpful to the world, and also a bit of fun."

By any standard, Professor Akerlof succeeds on all counts!

Related Links:

UC Berkeley's Coverage of Akerlof and the Nobel Prize;

The Economics Department

The Nobel Foundation