In a strange bit of synergy, Tim Harford writes a column on George Akerlof’s famous paper on used cars:
In 1966 an assistant economics professor, George Akerlof, tried to explain why this is so in a working paper called “The Market for ‘Lemons.’ ” His basic insight was simple: If somebody who has plenty of experience driving a particular car is keen to sell it to you, why should you be so keen to buy it?
Akerlof showed that insight could have dramatic consequences. Buyers’ perfectly sensible fears of being ripped off could, in principle, wipe out the entire used-car market: There would be no price that a rational seller would offer that was low enough to make the sale. The deeper the discount, the more the buyer would be sure that the car was a terrible lemon.
Many people recognize that they are reluctant to sell their own car if it’s running well. That is informal evidence for Akerlof’s thesis, since if buyers were able to appreciate the qualities of each car, good cars would fetch more money and it should be no more attractive to sell a cheap lemon than an expensive peach.
But the used-car market hasn’t disappeared, and so economists have debated how much Akerlof’s model really explains the market. For instance, there’s been a lively controversy as to whether pickup trucks that are sold secondhand have higher maintenance bills than pickup trucks of the same age that are not sold. (If they do, that’s evidence in favor of Akerlof’s “lemons” model.)
More or less concurrently, Crooked Timberites debate the influence of advertising on consumer behavior–does it provide information to rational agents, manufacture demand, or a bit of both?
Galbraith’s ideas about advertising might solve the used-car market problem by explaining why people might get rid of perfectly good cars they’ve bought… or (to drive the point home) leased. If they do, is this because advertising provides us with mportant information about snazzy new automobile features that should compel us to get rid of otherwise perfectly good automobiles? Or because it helps convince us that owning a new car makes us sexier, more successful, and otherwise status-worthy and complete people?
I swear I only want to trade in my ’98 Honda Civic for a shiny new or off-lease Volkswagen, Subaru, or Volvo wagon because we really need more space to transport our toddler’s paraphernalia. Really.
And yes, most of colleagues do seem to drive Volvos, Saabs, or Subarus.