George Akerlof was born on June 17, 1940, in New Haven, Connecticut. Akerlof received his Bachelor’s degree from Yale in 1962, and his Ph.D. in economics from MIT in 1966. It was during these years that Akerlof began conducting his extensive research in Keynesian macroeconomics.
After graduating, Akerlof became an assistant professor at the University of California, Berkeley. During his first year at Berkeley that, he wrote “The Market for Lemons: Quality Uncertainty and the Market Mechanism,” in which he coined the term “lemon” for a car with hidden defects. In 1967-68, Akerlof spent a year at the Indian Statistical Institute in New Delhi. There he attempted to develop a program to evenly allocate water from the nearby dam. He also continued his research on unemployment and the gaps between supply and demand.
In 1969, after returning from India, Akerlof was granted tenure and joined the faculty in Berkelye’s Department of Economics. In 1977, he moved to Washington, D.C. to work for the Federal Reserve Board in Washington, D.C., where he met Janet Yellon. In Efficiency Wage Models of the Labor Market, Akerlof and coauthor Janet Yellen (who he later married) propose rationales for the efficiency wage hypothesis in which employers pay above the market-clearing wage, in contradiction to the conclusions of neoclassical economics.
Akerlof spent time at the London School of Economics, before returning to Berkeley in 1980. Akerlof decided to change his focus in research from macroeconomics to studying the fairness and social customs of unemployment. From 1994 to 1999, Akerlof moved back to Washington, D.C., becase his wife had been named to the Board of Govenors of the Federal Reserve System. Akerlof and his wife returned to Berkeley in 1999, and since then Akerloff has served as the Koshland Professor of Economics.
Akerlof received the Nobel Prize for Economics in 2001, along with Michael Spence and Joseph Stiglitz, for their contribution to the theory of information asymmetries. Together, they researched screening, a technique used by one economic agent to extract otherwise private information from another.
The following press release from the Royal Swedish Academy of Sciences describes Akerlof's work:
Many markets are characterized by asymmetric information: actors on one side of the market have much better information than those on the other. Borrowers know more than lenders about their repayment prospects, managers and boards know more than shareholders about the firm's profitability, and prospective clients know more than insurance companies about their accident risk. During the 1970s, this year's Laureates laid the foundation for a general theory of markets with asymmetric information. Applications have been abundant, ranging from traditional agricultural markets to modern financial markets. The Laureates' contributions form the core of modern information economics.
George Akerlof demonstrated how a market where sellers have more information than buyers about product quality can contract into an adverse selection of low-quality products. He also pointed out that informational problems are commonplace and important. Akerlof's pioneering contribution thus showed how asymmetric information of borrowers and lenders may explain skyrocketing borrowing rates on local Third World markets; but it also dealt with the difficulties for the elderly to find individual medical insurance and with labour-market discrimination of minorities.