So the companies "intervene." They ration coverage, giving no customer as much as he would like, which encourages homeowners to install fire-safety devices. And they charge high premiums for the most complete coverage, while costumers who consider themselves low risk can choose a high deductible in exchange for a lower premium.
Stiglitz joined the Columbia faculty in July from Stanford, where he had been a professor since 1988, with time out in the 1990s for service in Washington as chairman of President Bill Clinton's Council of Economic Advisers and chief economist at the World Bank.
Akerlof was honored mainly for a 1970 essay, "The Market for Lemons," which the Nobel committee described as "the single most important study in the literature on economics of information."
Akerlof's insight came out of his observation that nearly every used-car buyer worries whether he or she is overpaying for a defective vehicle. The used-car dealer knows its status but the buyer lacks this information, and too many bad experiences can disrupt the used-car market. The advent of lemon laws helped to prevent this.
Critics argue that Akerlof's paper, and the findings of information economics in general, lack support in empirical research. "There is no evidence that the cars that are sold are lemons," said Orley Ashenfelter, a Princeton economist. Akerlof replies that his used-car work "is empirical in the sense that we took the behavior that everyone knows and put it into theory that explains what is involved in markets more generally."
Spence holds a doctorate in economics from Harvard University, but has not practiced his profession since 1984, when he became dean of the School of Arts and Sciences at Harvard, and in 1990, dean of Stanford's business school. The Nobel award came mainly on the strength of a single paper that Spence published in 1973 describing "market signals."
In the pure model of a free market, consumers are presumed to have perfect knowledge, able to accurately tell the differences in quality among, say, various models of refrigerators. Prices would automatically reflect that understanding. But most consumers lack this information, so sellers intervene, offering comprehensive warranties, for example, to signal high quality. "If a seller gave a fancy warranty on a product that broke down a lot," Spence said, "he could go broke."
Stiglitz also relied on his research to challenge traditional International Monetary Fund practices that led, he concluded, to unnecessary economic trauma during the Asian financial collapse of the late 1990s.
Because of his repeated criticism of the IMF, Stiglitz found himself forced from his World Bank job last year. But he has not let up. "There were terrible results in Asia," Stiglitz said at his news conference Wednesday. "The IMF is only now changing its view."
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