Of marriages, second hand cars and being unemployed

car

Since I started working nearly a decade and a half back, I have quit four jobs. Three out of four times, I quit without having a new job in place. Two out of the three times I was looking for a job, I easily found one.

Nevertheless, if you go by conventional advice this is really not done. And there is solid logic behind it. The economists call it information asymmetry. This is essentially a situation where the seller has more information than the buyer.

When I quit a job and look for a new job, I am a seller of services. The prospective employer is the buyer. I know why I quit my job, the prospective
does not. This is information asymmetry and it creates doubts in the mind of the prospective employer.

The following questions might crop up in the mind of the prospective employer: a) Why did he quit his job? b) Did he really quit, or was he fired? c) Is he too much of a rebel?

The information asymmetry creates problems. As Ray Fisman and Tim Sullivan write in The Inner Lives of Markets: “If a job applicant’s previous employer didn’t want to keep him on the payroll, it’s worth asking why not. You can also imagine that the problem deepens the longer you’ve been out of work: Why on earth hasn’t she found someone willing to give her job and what are other prospective employers seeing that I don’t.”

And this is why quitting a job without having a new one, is something really not done, unless you are thinking of doing something else. Information asymmetry spoils the job market for everyone who quits a job, without having a new one. This, despite the fact that the individual quitting the job might simply be bored or not have gotten along with a nasty boss.

The situation is similar to those who resist marriage for a long time and then want to get married, a little late in life.

As Fisman and Sullivan write: “If you’re still single by the time you reach a certain age, it becomes harder and harder to convince a potential mate, that there isn’t something wrong with you.” In the Indian context, this means regular questions and comments from relatives, as well. I remember a few years back, my maternal grandfather, asked my sister: “If I didn’t like women”. I was 32-33, at that point of time and single. Information asymmetry got to my grandfather as well.

And what is true about jobs, single individuals, is also true about second hand cars. Economist George Akerlof wrote a rather unusual research paper The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, which was published in 1970.

In this paper Akerlof talks about the second hand car market in the United States. He pointed out that there are essentially four types of cars. “There are new cars and used cars. There are good cars and bad cars. A new car may be a good car or a lemon, and of course the same is true of used cars.” Bad cars are referred to as lemons in the United States.

An owner of a car has a good idea about whether his car is a good car or a lemon. As Akerlof put it in his research paper: “After owning a specific car, however, for a length of time, the car owner can form a good idea of the quality of this machine…An asymmetry in available information has developed: for the sellers now have more knowledge about the quality of a car than the buyers.”

This leads to a problem where the buyer of the car has no idea as to how good or bad the car is. Hence, as Akerlof put it: “The bad cars sell at the same price as good cars since it is impossible for a buyer to tell the difference between a good and a bad car; only the seller knows.”

Information asymmetry essentially stops the job market, the marriage market as well as the second hand car market, from working properly.

The column originally appeared in the Bangalore Mirror on July 27, 2016

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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