Economic Theory explained by Football – Part 2 – Market Uncertainty

In the second of my deep-thinking articles, I try to explain famous Economic theories by using football as the model.  Today, the work of George Akerlof on Market Uncertainty.

The Market for Lemons was a controversial piece of research published by Nobel Prize-winning academic and famous Leyton Orient fan, George Akerlof.  Up until his work was published, most economists believed that markets would allow everyone willing to sell goods at a certain price to make deals with anyone who wanted to buy goods at that price.

IMG_1105Akerlof, frustrated by the fact that the O’s (back then they were just Orient) kept bringing in short-term players who were basically rubbish, explained how uncertainty caused by limited information caused markets to fail.  As a football club who hold a player’s contract have more information about him than a potential buying club, it can often be a bad move to buy the player.  In other words, if you do not do your research on a player, you are liable to buy a lemon.

Whilst Akerlof’s research was based on the second-hand car market in the US, he also kept a close eye on the transfer dealings of third tier English football clubs.  In the same way that sellers of better-than-average cars to sell will withdraw them from the market because it is impossible for them to get a fair price from a buyer who is unable to tell whether that car is a lemon or not, football clubs needed a way to ensure that they weren’t buying an old crock.

He suggested that football clubs could “borrow” a player for a short period of time to see if he is fit, able and not a mass murderer before they made a decision to buy him.  That way, a fair price could be determined between the buying and selling club.  Furthermore, he concluded that if a player is passed from club to club on loan then he is a lemon, just like a used car that has had dozens of owners.

Football clubs that are desperate to sign a player for a particular position, perhaps due to injury, are often held to ransom by selling clubs, knowing that they can try and extract a few more million for a player who is completely over-valued.  Rather than over paying for the player they are forced into the loan market where they may get some short-term gain but ultimately, loan deals are flawed in the same way that second hand cars are.

And that, ladies and gentlemen, is the theory of Market Certainty.

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