George Akerlof

George Akerlof
Born	George Arthur Akerlof 17 6, 1940
Birthplace	New Haven, Connecticut, U.S.
Nationality	American
Occupation	Economist, academic
Title	University Professor, McCourt School of Public Policy
Employer	Georgetown University
Known for	Information asymmetry, efficiency wages, "The Market for Lemons"
Education	Massachusetts Institute of Technology (PhD)
Spouse(s)	Janet Yellen (m. 1978)
Children	1
Awards	Nobel Memorial Prize in Economic Sciences (2001)
Website	[http://emlab.berkeley.edu/users/akerlof/ Official site]

George Arthur Akerlof (born June 17, 1940) is an American economist who holds a university professorship at the McCourt School of Public Policy at Georgetown University and is Koshland Professor of Economics Emeritus at the University of California, Berkeley. He was awarded the 2001 Nobel Memorial Prize in Economic Sciences, jointly with Michael Spence and Joseph Stiglitz, for their analyses of markets with asymmetric information. Akerlof's most celebrated contribution to economics is his 1970 paper "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," which demonstrated how markets can collapse when buyers and sellers possess different information about the quality of goods. This insight, deceptively simple in its formulation yet profound in its implications, helped establish information economics as a major field of study and transformed economists' understanding of how real-world markets function. Beyond his work on information asymmetry, Akerlof has made significant contributions to theories of efficiency wages, identity economics, and behavioral macroeconomics, drawing on sociology and psychology to enrich economic analysis. He is married to Janet Yellen, the former Chair of the Federal Reserve and former United States Secretary of the Treasury.

Early Life

George Arthur Akerlof was born on June 17, 1940, in New Haven, Connecticut. His father, Gösta Carl Akerlof, was a Swedish-born chemist who had emigrated to the United States and became a faculty member at Yale University. His mother, Rosalie Clara Hirschfelder Akerlof, was of German descent. Growing up in an academic household in New Haven provided Akerlof with early exposure to intellectual life and scholarly pursuits. His brother, Carl W. Akerlof, became a noted physicist.

Akerlof's upbringing in a university community shaped his intellectual curiosity and orientation toward academic life. The environment of New Haven, centered around Yale University, afforded him access to a rigorous educational culture from a young age. His father's career as a chemist at Yale meant the family was embedded in the academic milieu of one of America's premier research universities, an environment that nurtured the young Akerlof's interest in analytical thinking and social questions.

Akerlof has spoken about the influences that shaped his early intellectual development, including the broader cultural and intellectual atmosphere of postwar American academia. His trajectory from the son of an immigrant scientist to one of the most influential economists of the twentieth century reflects both the meritocratic ideals of American higher education and the interdisciplinary sensibility that would come to define his scholarly work.

Education

Akerlof attended Yale University as an undergraduate, where he earned his Bachelor of Arts degree in 1962. He then pursued graduate studies at the Massachusetts Institute of Technology (MIT), one of the foremost centers of economics research in the world. At MIT, Akerlof studied under Robert Solow, the distinguished macroeconomist who would himself receive the Nobel Memorial Prize in Economic Sciences in 1987. Akerlof completed his doctoral dissertation, titled "Wages and Capital," in 1966. The graduate training at MIT, which emphasized mathematical rigor alongside attention to real-world economic problems, proved formative for Akerlof's subsequent career. His time at MIT coincided with an era of great intellectual ferment in economics, and the analytical tools he acquired there equipped him to tackle the problems of information and uncertainty that would define his most important work. The influence of John Maynard Keynes on Akerlof's thinking, which would become increasingly apparent throughout his career, was also nurtured during his years of graduate study, as the Keynesian tradition remained a powerful force at MIT during the 1960s.

Career

Early Academic Career and "The Market for Lemons"

After completing his PhD at MIT in 1966, Akerlof joined the faculty of the University of California, Berkeley, where he would spend the bulk of his academic career. He also held a visiting position at the London School of Economics during the course of his career.

It was during his early years at Berkeley that Akerlof produced the work for which he is best known. In 1970, he published "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism" in The Quarterly Journal of Economics. The paper used the used car market as its central example to illustrate a broader principle about how markets function—or fail to function—when one party to a transaction possesses more information than the other.

In the "lemons" model, sellers of used cars know the quality of their vehicles, but buyers cannot easily distinguish between good cars and defective ones ("lemons"). Because buyers are aware of their informational disadvantage, they are only willing to pay a price that reflects the average quality of cars on the market. This average price, however, is too low for sellers of high-quality cars, who withdraw their vehicles from the market. The result is a process of adverse selection in which the market becomes increasingly dominated by low-quality goods, potentially leading to market collapse.

As Akerlof himself later recounted, the paper's path to publication was far from smooth. It was rejected by multiple journals before finding its home in the Quarterly Journal of Economics. Some reviewers considered the argument trivial; others deemed it incorrect. The paper, as Akerlof noted in his Nobel lecture, "deals with a problem as old as markets themselves," concerning "how horse traders respond to the natural question: 'if he wants to sell that horse, do I really want to buy it?'" Despite its initially rocky reception, the paper became one of the most cited articles in the history of economics and fundamentally reshaped the discipline's understanding of markets under conditions of imperfect information.

The implications of the lemons model extended far beyond the used car market. Akerlof demonstrated that asymmetric information could explain phenomena across numerous markets, including insurance, credit, and labor markets. The concept of adverse selection that the paper formalized became central to the fields of insurance economics, contract theory, and mechanism design. The paper also helped explain why institutions such as warranties, brand names, and licensing requirements exist—they serve as mechanisms to mitigate the problems caused by information asymmetry.

Efficiency Wages and Labor Economics

Beyond his work on information asymmetry, Akerlof made substantial contributions to labor economics through his research on efficiency wages. The efficiency wage hypothesis holds that employers may find it profitable to pay workers above the market-clearing wage because higher wages can increase worker productivity, reduce turnover, and improve the quality of job applicants. This theory challenged the standard neoclassical assumption that wages are determined solely by the intersection of labor supply and demand, and it provided a theoretical foundation for understanding involuntary unemployment—a phenomenon that standard models struggled to explain.

Akerlof's approach to efficiency wages drew on sociological concepts of gift exchange and social norms, reflecting his long-standing interest in incorporating insights from other social sciences into economic analysis. He argued that workers who receive wages above the minimum necessary to retain them may reciprocate by exerting greater effort, creating a mutually beneficial exchange that goes beyond the narrow calculus of homo economicus. This line of research was characteristic of Akerlof's broader intellectual project of bringing behavioral and sociological considerations into mainstream economics.

Akerlof also contributed to the literature on the economics of looting, co-authoring a notable paper with Paul Romer titled "Looting: The Economic Underworld of Bankruptcy for Profit," which analyzed how the structure of financial guarantees and regulations could create incentives for owners to loot their own firms. The paper proved prescient in light of subsequent financial crises and contributed to ongoing debates about financial regulation and moral hazard.

Identity Economics

In the 2000s, Akerlof embarked on a new research program that would become known as identity economics, developed in collaboration with Rachel Kranton of Duke University. This work sought to incorporate the concept of identity—the sense of self that individuals derive from their social categories and the norms associated with those categories—into formal economic models.

The foundational paper in this research agenda, "Economics and Identity," published in the Quarterly Journal of Economics in 2000, argued that people's economic decisions are shaped not only by their material incentives but also by their sense of who they are and how they fit into social categories. Violations of identity-related norms can generate anxiety and discomfort, which in turn influence economic behavior. This framework was applied to a wide range of phenomena, including gender discrimination in the workplace, educational outcomes, poverty, and social exclusion.

Akerlof and Kranton expanded this work into a book, Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being, published by Princeton University Press in 2010. The book presented their argument in accessible form, making the case that identity is a fundamental motivation that economics had largely overlooked. They maintained that incorporating identity into economic models could yield better predictions and more effective policies in areas ranging from education to military organization to workplace management.

The identity economics research program represented a significant departure from the standard economic toolkit and reflected Akerlof's career-long commitment to enriching economic theory by drawing on other social sciences. A dedicated website was established to disseminate this research.

New Keynesian Economics and Behavioral Macroeconomics

Throughout his career, Akerlof has been associated with the school of New Keynesian economics, which seeks to provide microeconomic foundations for Keynesian macroeconomic propositions. His work has emphasized the role of market imperfections, including information asymmetries, sticky wages, and social norms, in generating macroeconomic outcomes such as unemployment and business cycles.

Akerlof's approach to macroeconomics has been characterized by a willingness to incorporate psychological and sociological insights, placing him at the intersection of behavioral economics and macroeconomic theory. He has argued that standard macroeconomic models, by assuming fully rational agents with perfect information, fail to capture important features of real economies. His research has emphasized the roles of fairness, social norms, and bounded rationality in shaping macroeconomic outcomes.

Akerlof was a vocal critic of the Iraq War, articulating his opposition in a 2003 public statement in which he argued that the war was detrimental to the interests of the United States and the world. He also engaged with public policy issues related to climate change, contributing to discussions on the economics of global warming.

Georgetown University and Later Career

In 2014, Akerlof joined the McCourt School of Public Policy at Georgetown University as a university professor, while retaining his emeritus status at Berkeley. Prior to joining Georgetown, he had served as a senior resident scholar at the International Monetary Fund (IMF). The move to Georgetown reflected Akerlof's continued engagement with public policy questions and his desire to contribute to the training of a new generation of policy-oriented scholars.

At Georgetown, Akerlof continued his research and teaching, bringing his interdisciplinary approach to economics to a public policy setting. His appointment was regarded as a significant addition to the McCourt School's faculty, reinforcing its standing as a center for economics-informed policy analysis.

Doctoral Students

Among Akerlof's doctoral students at Berkeley were Charles Engel, who became a prominent international finance economist, and Adriana Kugler, who went on to serve in government and academic positions.

Personal Life

George Akerlof married Janet Yellen in 1978. The couple met while both were economists at the Federal Reserve Board in Washington, D.C. Their partnership has been both personal and professional; they have co-authored research together on topics including labor markets and macroeconomics. Yellen went on to serve as Chair of the Council of Economic Advisers under President Bill Clinton, President of the Federal Reserve Bank of San Francisco, Chair of the Federal Reserve, and United States Secretary of the Treasury under President Joe Biden.

The couple has one son, Robert Akerlof, who also pursued a career in economics. A Fortune magazine profile described the Akerlof-Yellen partnership as one in which both spouses found intellectual companionship and mutual support throughout their careers in economics and public service.

Akerlof's brother, Carl W. Akerlof, is a physicist who has worked in the field of astrophysics.

An anecdote from Akerlof's career, recounted by economist David R. Henderson, describes how Henderson once persuaded Akerlof to advocate for a presidential veto of a minimum wage increase, illustrating the collegial and sometimes surprising nature of intellectual exchange among economists with differing policy views.

Recognition

Akerlof's most prominent honor is the 2001 Nobel Memorial Prize in Economic Sciences, which he shared with Michael Spence and Joseph Stiglitz. The Royal Swedish Academy of Sciences awarded the prize to the three economists "for their analyses of markets with asymmetric information." In his Nobel interview, Akerlof discussed the development of his ideas and their implications for economic theory and policy.

Akerlof is a Fellow of the American Academy of Arts and Sciences. He has been recognized by Encyclopædia Britannica with a biographical entry acknowledging his contributions to economics.

A 2011 profile by the International Monetary Fund described Akerlof's approach as representing "the human face of economics," highlighting his efforts to bring psychological and sociological realism into economic models that had traditionally relied on the assumption of purely rational, self-interested agents.

His research output is catalogued in the Research Papers in Economics (RePEc) database, where his works are among the most accessed and cited in the profession.

Akerlof is also profiled by the Library of Economics and Liberty in its Concise Encyclopedia of Economics.

Legacy

George Akerlof's contributions to economics have reshaped the discipline's understanding of how markets operate in the presence of incomplete and asymmetric information. His 1970 "Market for Lemons" paper is among the most influential articles in the history of economics, having spawned an extensive literature on adverse selection, signaling, and screening mechanisms. The concepts he introduced have become standard tools in fields ranging from insurance economics to finance, from health economics to development economics.

The practical implications of Akerlof's work on information asymmetry extend into numerous areas of economic policy. His research provides theoretical justification for consumer protection regulations, disclosure requirements in financial markets, quality certification systems, and many other institutional arrangements designed to address the problems that arise when parties to a transaction do not share the same information. The relevance of these insights was underscored by the financial crises of the late twentieth and early twenty-first centuries, in which information problems played a central role.

Akerlof's efficiency wage theory contributed to a fundamental rethinking of labor market dynamics, providing explanations for persistent unemployment that were grounded in the microeconomic behavior of firms and workers rather than relying solely on macroeconomic aggregates. His emphasis on social norms, fairness, and identity in economic behavior helped pave the way for the broader acceptance of behavioral economics within the mainstream of the discipline.

Through his work on identity economics, Akerlof pushed the boundaries of economic analysis further still, arguing that the social categories to which individuals belong and the norms associated with those categories are fundamental determinants of economic outcomes. This research program opened new avenues for understanding phenomena such as educational achievement gaps, gender discrimination, and organizational behavior.

As a teacher and mentor at Berkeley and Georgetown, Akerlof influenced generations of economists, many of whom have gone on to make their own contributions to the field. His career exemplifies an approach to economics that values real-world relevance, interdisciplinary openness, and a willingness to challenge received wisdom—qualities that have ensured his work remains central to contemporary economic thought.