Monday, 24 January 2011

Business English: Working in the Lemon Market

Sam Levenson once remarked that we must learn from the mistakes of others because we  can't possibly live long enough to make them all ourselves.

Nowhere is this advice more pertinent than in the case of second-hand, or as Americans more tellingly describe them, used cars.

Most buyers of used cars are beset by the problem of asymmetrical information.

Unlike the seller, they don't know if the car is in good condition or not.

In all likelihood, they don't even know what 'good condition' is either.

George Akerlof won a Nobel Prize for introducing the world to this idea in his 1970 paper 'The Market for Lemons: Quality Uncertainty and the Market Mechanism'.

In this paper, Akerlof argues that if the buyer does not know if a car is a cherry (a good car) or a lemon (a bad car), he is forced to assume that it is a kind of hybrid.

Accordingly, the buyer will only be willing to pay a hybrid price.

The real kicker is that owners of genuine cherries, cars of unimpeachable quality, will quickly realise that they are unable to get a fair price for their superior condition car.

They will then withdraw from the market and the average quality of cars on the market will fall commensurately, leading the buyer to reduce the price he is willing to pay, and so on, in a vicious circle.

There has been some debate as to whether a lemon market really does exist in the sphere of used cars, but can there be any doubt that it exists in the world of EFL?

To begin with, by default, very few buyers have sufficient understanding of the product they are buying, which is why they are buying it in the first place.

Secondly, there is a large incentive for sellers to pass off poor quality EFL instruction as high quality EFL instruction.

Thirdly, EFL cherries have no credible way to indicate their cherry status.

Accordingly, then, buyers, or students, only offer a medium price and better quality sellers, or teachers who want a wage commensurate with their skills, withdraw from the market, largely becoming course book writers or instructors of the next generation of sellers, thus diluting the quality of the market even further, and so on.

In short, the bad drive out the good.

Michael Spence, who shared the 2001 Nobel Prize with Akerlof, proposed, in his seminal 1973 paper 'Job Market Signaling', that to offset the effects of asymmetrical information, sellers could send a signal to buyers.

The example he provides of a signal in the job market is education.

Better potential employees invest more heavily in their education, and by doing so reduce the information gap, allowing employers to pick them ahead of bad potential employees.

This leads to the so-called Sheepskin Effect whereby those with a higher education earn higher wages.

All of which leads me to wonder: is there is a Sheepskin Effect in Business English, and, if not, what signals can be devised to create one?

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