The Market for Lemons

The Market for Lemons ( 1970) is an essay by the American economist George A. Akerlof ( Nobel Prize 2001), in which he known as the Lemons problem (English Lemons trouble, hence lemon problem or issue Monday cars) developed.

It is a special problem of the asymmetric information, the so-called hidden characteristics. This means that a buyer before the contract does not know the quality of the product offered, or can judge. Without the proper information can then make no optimal decisions. George Akerlof was the first examined the effects of asymmetric information regarding product quality.

If buyers can an estate is difficult to assess, they will pay on average less than they would pay if there was only good goods - they take into account the risk of catching a "lemon ". Thus, the supplier tends to be overcome with high quality and high price, because no one buys them. There are proportionately more " lemons ". The elimination of the so-called information asymmetry serves as a solution. Furthermore, also can produce products of lower quality, not to be driven from the market, the seller with high quality.

Example

Akerlof illustrated the Lemons problem using the market for used cars. Lemon is in the U.S. this is a colloquial term for a low-quality used cars.

As buyers of second hand the quality of the offered vehicles ( if any) can not judge free, they would be offered in a market in which both good and bad cars ( " lemons " ), for example, form an expectation value for the quality of the car. This price is below that reservation price ( some of) the provider of good car. These providers are not willing to sell at this price, and will leave the market. Allowing suppliers of good cars are being systematically pushed out of the market, so in the end only would be offered to the bad cars.

In this case, the market dies completely (market failure). You can prevent the collapse, but the elimination or mitigation of information asymmetry caused thereby costs (eg TÜV-/DEKRA-Siegel for used cars, extensive test drives ). In the other cases of asymmetric information, there is a deviation from the efficient solution with complete information, within the framework of principal-agent theory, these costs are called agency costs.

Importance

" The Market for Lemons " triggered a paradigm shift in economic research, which to date is current as New Institutional Economics.