Archive for January 17th, 2019

January 17, 2019

The Market for Lemons

lemon law

The Market for Lemons: Quality Uncertainty and the Market Mechanism is a well-known 1970 paper by American economist George Akerlof which examines how the quality of goods traded in a market can degrade in the presence of information asymmetry between buyers and sellers, leaving only ‘lemons’ behind (cars or other products that are found to be defective only after they have been bought).

Akerlof’s paper shows how prices can determine the quality of goods traded on the market. Low prices drive away sellers of high-quality goods, leaving only lemons behind. In 2001, Akerlof, along with Michael Spence, and Joseph Stiglitz, jointly received the Nobel Memorial Prize in Economic Sciences, for their research on issues related to asymmetric information.

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