In my youthful past when I sent an article to an academic journal and it was rejected my reaction was often one of fury. This was often amplified by the fact that many referee reports are dismissive and careless*. These days I still occasionally get angry but I have also become more philosophical as a product of what must be hundreds of interactions with editors and referees.
George Akerlof's paper on 'lemons' is one of the beautiful contributions I have come across in microeconomics. It shows depth of vision. It changed the way we do microeconomics and the role we advocate for markets.
Akerlof considers a car vendor selling second-hand cars that may either be 'quality vehicles' or 'lemons'. It is a standard market situation except for one thing - the vendor has better information about the quality of the cars sold than potential purchasers. This is asymmetrical information. Potential customers will drop their bid for a car below the price of a 'quality car' because they will suspect there is some probability the car might be a 'lemon'. On the supply side fewer people will wish to trade in their 'quality' vehicles if bidders offer a reduced price. Thus iterating again the thought process of the buyer there will be an increased probability that any car is a lemon. Again this will influence the decision to sell a 'quality' used car and so on......
The upshot might be that the market for second hand quality cars disappears completely - or is greatly dinminished - as a consequence of the knowledge advantage of the car vendor. It is a brilliant insight with a host of applications in real markets - in health, education and in various professional services for example.
Akerlof made many valuable contributions in economics apart from the 'lemons' problem. Indeed I referred to his interesting work on behavioural macroeconomics on this blog. He was awarded the Nobel Prize in economics. In this interesting note Akerlof discusses the process of writing and submitting the 'lemons' paper. It was repeatedly rejected by leading journals in economics as 'trivial' but was anything but that.
* This carelessness doesn't always prevent publication. I have submitted one paper that I am now convinced was wrongly accepted. I am not saying where this is.