106_ackerlof

106_ackerlof - The Market for "Lemons": Quality...

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The Market for "Lemons": Quality Uncertainty and the Market Mechanism Author(s): George A. Akerlof Source: TheQuarterlyJournalofEconomics, Vol. 84, No. 3 (Aug., 1970), pp. 488-500 Published by: Oxford University Press Stable URL: http://www.jstor.org/stable/1879431 . Accessed: 06/08/2011 02:04 . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Oxford University Press is collaborating with JSTOR to digitize, preserve and extend access to The Quarterly Journal of Economics. http://www.jstor.org
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THE MARKET FOR "LEMONS": QUALITY UNCERTAINTY AND THE MARKET MECHANISM * GEORGE A. AKERLOF I. Introduction, 488.-II. The model with automobiles as an example, 489.- III. Examples and applications, 492.- IV. Counteracting institutions, 499. -V. Conclusion, 500. I. INTRODUCrION This paper relates quality and uncertainty. The existence of goods of many grades poses interesting and important problems for the theory of markets. On the one hand, the interaction of quality differences and uncertainty may explain important institutions of the labor market. On the other hand, this paper presents a strug- gling attempt to give structure to the statement: "Business in under- developed countries is difficult"; in particular, a structure is given for determining the economic costs of dishonesty. Additional appli- cations of the theory include comments on the structure of money markets, on the notion of "insurability," on the liquidity of dur- ables, and on brand-name goods. There are many markets in which buyers use some market statistic to judge the quality of prospective purchases. In this case there is incentive for sellers to market poor quality merchandise, since the returns for good quality accrue mainly to the entire group whose statistic is affected rather than to the individual seller. As a result there tends to be a reduction in the average quality of goods and also in the size of the market. It should also be perceived that in these markets social and private returns differ, and therefore, in some cases, governmental intervention may increase the welfare of all parties. Or private institutions may arise to take advantage of the potential increases in welfare which can accrue to all parties. By nature, however, these institutions are nonatomistic, and there- fore concentrations of power - with ill consequences of their own - can develop. *The author would especially like to thank Thomas Rothenberg for
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106_ackerlof - The Market for "Lemons": Quality...

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