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Numerous economic studies have shown that job applicants have more trouble finding a new job as their spell of unemployment gets longer. One recruiter told the New York Times that his clients are "looking for someone who's gainfully employed, who's closer to the action." A woman who had been out of work for six months said, "I feel like I am being shunned by our entire society" one recruiter told the woman that her spell of unemployment made her a "hard sell," despite her impressive skills. Many job listings explicitly state that people who have been out of work for a while should not apply (or at least that currently employed people are preferred). In that case, an unemployed person may have trouble finding a job because potential employers read a lot into the fact that the person is unemployed. Unfortunately, a much more problematic adverse selection dynamic occurs in the job market. Second, to the extent that being older and available is an indication of something negative, it is a trait I share with the women I date. People largely understand that choices made early in life may not be optimal and that we change over time. Essentially, just as the stigma of online dating has eroded over time, so has the stigma of divorce and delayed marriage. First, there may be perfectly good reasons that a man or woman my age has not had a lifetime relationship, though we are capable of it. Two things mitigate this particular form of adverse selection. In this case, the private information is that I am incapable of a long-term relationship and, though I'd like to hide that fact, it is revealed by my presence on the dating market. What does that tell you? One interpretation is that I am the result of adverse selection because I couldn't sustain a marriage or couldn't even develop a long-term relationship in the first place. While online dating sites may not have a stigma associated with them, I have another problem. A recent study by psychologists reached the conclusion that "online dating has entered the mainstream, and it is fast shedding any lingering social stigma." So I don't have to worry about adverse selection issues when I go online. While it was initially perceived that only desperate people would use online dating, others began to realize that online dating sites provided a rich source of potential mates and many of the other advantages already discussed.
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In both cases, the "seller" of the good (whether that good was a car or the dater himself) revealed private information about the good's quality through the way he sold it.įortunately, the stigma associated with online dating has largely disappeared over time. Or, thought of another way, just as there is a certain stigma to selling a used car that you cannot prove is a plum, there was a stigma to being unable to find a partner through standard methods of networking. Sadly, the same forces that make the available used cars disproportionately likely to be lemons could also have made the people who used early dating services likely to be loners or losers. The outcomes on the used car market become self-fulfilling - all cars on the market are lemons because the plum buyers will not sell for the going rate.Īnd that is the very essence of adverse selection - if sellers have hidden information, they will offer only the unattractive merchandise for sale. In this market, owners of plums will not be willing to part with perfectly good cars, since the fixed price will reflect that many of the cars on the market are likely to be lemons. Because sellers know the difference between the types is indistinguishable to buyers, there will be one price for all used cars. Imagine a very stark world, though, in which the sellers of used cars know whether the car they are selling is a lemon or a plum but the buyers cannot tell them apart. Used-car buyers are willing to pay more for a plum than for a lemon, of course.
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He started by thinking about two types of used cars: lemons, which have problems and will be in the shop regularly, and plums, which still run without issue. Akerlof focused on used cars in his work. The key insight of Akerlof's analysis was that hidden information can lead to markets where only the least desirable goods trade hands. George Akerlof received a Nobel Prize in economics for his pioneering work on problems of hidden information, or adverse selection in economics terminology. Hidden information problems are certainly not limited to the world of dating.