School & District Management Opinion

Lessons for Education Policy Research from the Market for Lemons

By Eduwonkette — July 14, 2008 2 min read
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Does the market for research in education policymaking work pretty well? For once, eduwonk, Dean Millot, and I all agree - it doesn’t. The “market for lemons,” which Jay Greene makes reference to in his most recent post, gives us insight into why.

A common rationale given by economists for intervention in selected markets – for example, insurance markets - is the problem of asymmetric information, a gap in information available to buyers and sellers in a market. Using the example of used car markets, Nobel prize winning economist George Akerlof lays out this dilemma in his famous paper, “The Market for Lemons: Quality Uncertainty and the Market Mechanism.”

Imagine you’re selling a used car. You know the problems with your car, but your potential buyers don’t. You may be trying to swindle unsuspecting buyers because you know it has major defects. But your potential buyers aren’t stupid, and they know that they can’t trust you to provide an honest appraisal of your car’s problems.

If buyers don’t decide to avoid this market altogether, they end up betting on averages. They’ll only pay a price that reflects the average frequency of lemons in the used car market. That’s a price that’s too high for a lemon, but too low for a car of good quality. If you’ve got a good car, you know you’re going to get too low a price in the used car market, so you’re likely to not to sell there.

When sellers of good cars refuse to sell, lemons increase in frequency in the market. As a result, the people selling good cars are really in trouble, because they will end up getting an even lower payout for a good car. Now they are even less likely to sell them there, and the frequency of lemons continues to rise.

Left unchecked, the end result is market failure. What this means is that there are people who want to buy good cars and people who have them to sell, but that they are afraid of getting stuck with a lemon keeps that trade from happening.

The situation in education policy is analogous, but a little different. Sellers in the research market know what they are selling, but buyers like policymakers, journalists, and superintendents don’t have the expertise to evaluate what they are buying. They don’t differentiate between a paper in the American Economic Review – the best peer-reviewed journal in economics – and a report issued by a pro-vouchers thinktank. Unlike the used car market, the buyers aren’t always suspicious enough, in some cases because the buyers are constantly changing and don’t have the time to build up knowledge about reputations, which help to regulate markets with asymmetric information. Journalists get moved around from beat to beat, and policymakers come and go.

For some parties, there’s no incentive to be suspicious. Stories need to be written, laws need to be pushed through, and it’s not the editor or reporter or legislator who gets stuck on the side of the road when the car sputters out. It’s the public that gets left holding an empty bag when we rely on potentially flawed research to shape public policy.

Anyone have ideas on how this market could operate better? Or do ideologically driven policymakers, who can find “research” to support just about anything, simply prefer the status quo?

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