Around the 1970s the study of market failures again came into focus with the stu dy of information asymmetry. In particular three authors emerged from this perio d: Akerlof, Spence, and Stiglitz. Akerlof considered the problem of bad quality cars driving good quality cars out of the market in his classic The Market for Le mons (1970) because of the presence of asymmetrical information between buyers an d sellers.[26] Spence explained that signaling was fundamental in the labour mar ket, because since employers can't know beforehand which candidate is the most p roductive, a college degree becomes a signaling device that a firm uses to selec t new personnel.[27] A synthesizing paper of this era is Externalities in Economi es with Imperfect Information and Incomplete Markets by Stiglitz and Greenwald:[2 8] the basic model consists of households that maximize a utility function, firm s that maximize profit and a government that produces nothing, collects taxes, and distributes the proceeds. An initial equilibrium with no taxes is assumed to ex ist, a vector x of household consumption and vector z of other variables that af fect household utilities (externalities) are defined, a vector p of profits is d efined along with a vector E of households expenditures. Since the envelope theo rem holds, if the initial non taxed equilibrium is Pareto optimal then it follow s that the dot products ? (between p and the time derivative of z) and B (betwee n E and the time derivative of z) must equal each other. They state: "Except in the special case (which is unlikely to hold generically) where ? and B exactly cancel each other out, the existence of these externalities will make the initial equilibrium inefficient and guarantee the existence of welfare-impro ving tax measures." One application of this result is to the already mentioned Market for Lemons, wh ich deals with adverse selection: households buy from a pool of goods with heter ogeneous quality considering only average quality, since in general the equilibr ium is not efficient, any tax that raises average quality is beneficial (in the sense of optimal taxation). Other applications were considered by the authors, s uch as tax distortions, signaling, screening, moral hazard, incomplete markets, queue rationing, unemployment and rationing equilibrium. Behavioral economics[edit] Asymmetric value function in prospect theory: big losses have a much bigger psyc hological impact than big gains Kahneman and Tversky published a paper in 1979 criticizing the very idea of the rational economic agent.[29] The main point is that there an asymmetry in the ps ychology of the economic agent that gives a much higher value to losses than to gains. This article is usually regarded as the beginning of behavioral economics and has consequences particularly regarding the world of finance. The authors s ummed the idea in the abstract as follows: "...In particular, people underweight outcomes that are merely probable in compa rison with outcomes that are obtained with certainty. This tendency, called cert ainty effect, contributes to risk aversion in choices involving sure gains and t o risk seeking in choices involving sure losses. In addition, people generally d iscard components that are shared by all prospects under consideration. This ten dency, called the isolation effect, leads to inconsistent preferences when the s ame choice is presented in different forms." More recently, the continuing Great Recession brought the principal agent problem again to the center of debate, in particular regarding corporate governance.[30] References[edit] Jump up ^ Marchant, Mary A.; Snell, William M. "Macroeconomic and International Policy Terms". University of Kentucky. Retrieved 2007-05-04. ^ Jump up to: a b "Economics Glossary". Monroe County Women's Disability Network . Retrieved 2008-02-22. Jump up ^ "Social Studies Standards Glossary". New Mexico Public Education Depar tment. Archived from the original on 2007-08-08. Retrieved 2008-02-22. Jump up ^ "Glossary". ECON100. Retrieved 2008-02-22. Jump up ^ A. Cournot, Researches into the mathematical principles of the theory

of wealth, 1838 http://archive.org/details/researchesintom00fishgoog Jump up ^ S. Jevon, The Theory of Political Economy,1871 http://www.econlib.org/ library/YPDBooks/Jevons/jvnPE.html Jump up ^ C.Menger,Principles of Economics, 1871 http://mises.org/etexts/menger/ principles.asp Jump up ^ Leon Walras, Elements of Pure Economics, 1874 http://books.google.it/b ooks/about/Elements_of_Pure_Economics.html?id=hwjRD3z0Qy4C&redir_esc=y Jump up ^ A. Marshall, Principles of Economics, 1890 http://www.econlib.org/libr ary/Marshall/marP.html Jump up ^ A.Marshall, Principles of Economics, 1890, APPENDIX I:RICARDO'S THEORY OF VALUE http://www.econlib.org/library/Marshall/marP64.html Jump up ^ A.Marshall, Principles of Economics, 1890, BOOK VI, CHAPTER II: PRELIM INARY SURVEY OF DISTRIBUTION, CONTINUED. http://www.econlib.org/library/Marshall /marP44.html#Bk.VI,Ch.II Jump up ^ Thnen, J. H. von (1826). Der isolierte Staat in Beziehung auf Landwirth schaft und Nationalkonomie. 3 volumes. Jena, Germany: Fischer. Jump up ^ Cobb, C. W.; Douglas, P. H. (1928). "A Theory of Production". American Economic Review 18 (Supplement): 139 165. JSTOR 1811556. Jump up ^ Viner, Jacob (1931). "Costs Curves and Supply Curves". Zeitschrift fr N ationalkonomie 3 (1): 23 46. doi:10.1007/BF01316299. Reprinted in Emmett, R. B., ed . (2002). The Chicago Tradition in Economics, 1892 1945 6. Routledge. pp. 192 215.