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A market for Lemons
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tarix | 12.08.2018 | ölçüsü | 0,57 Mb. | | #62308 |
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Charles A. Holt Roger Sherman
Market Failure Under Asymmetric Information
The Quarterly Journal of Economics, Vol. 84, No. 3. (Aug., 1970)
Akerlof’s Lemons When product quality is unobservable by buyers, sellers will lower product quality. Buyers will expect sellers to “skimp” on quality, and they lower their willingness to pay. Prices will decline. In turn, sellers will be forced to lower quality even further to make profits at the lower prices. Thus, quality will decline until nothing but the lowest quality lemons are left.
Akerlof’s Lemons Thus, the market fails! Sellers cannot sell high quality goods at high prices even though buyers would be willing to pay the high prices for the high quality goods!
The Model (in brief) An object has value This value is known a priori to the seller. but does know that - (and, then it’s too late! No refunds!)
The Model (in brief) The seller’s utility is: The buyer’s utility is:
With - So trading is always Pareto-optimal.
The Model (in brief) The seller sells if:
Thus, by selling the object, he signals:
The Model (in brief) The buyer buys if:
And, he knows that
The Model (in brief) So, the buyer buys if: and, So,
The Model (in brief) Having is not enough. If but , the market FAILS.
The Classroom Experiment
Hold and Sherman’s Results
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