The Market for "Lemons": Quality Uncertainty and the Market Mechanism 淡江大學資訊管理研究所在職專班 陳雅玲 許瀞文 The Quarterly Journal of Economics, Vol. 84, No. 3. (Aug., 1970), pp Author : George A. Akerlof 2011/5/21

Introduction Quality and uncertainty The interaction of quality differences and uncertainty my explain important institutions of the labor market Business in under-developed countries is difficult

Introduction Economic costs of dishonesty Money markets Insurability Liquidity of durables Brand-name goods

The Automobiles Market Large price difference between new cars and used cars Probability q of a good car Probability (1-q) of a lemon After owning a specific car for a length of time, a new probability is reassigned by the owner

Different Views – Gresham’s Law Most cars traded will be the lemons Good cars may not be traded at all Like the bad money drives out the good Both bad and good cars sell the same price Both buyer and seller can tell Instructive but not complete

Asymmetrical Information Price of the automobile, p The average quality of used cars, => The supply of used cars and the average quality depend on the price => Supply equals Demand =>

Asymmetrical Information Utility theory

Asymmetrical Information Assume Both type 1 and type 2 traders are von Neumann-Morgenstern maximizers of expected utility Group 1 has N cars with uniformly distributed quality x, Group 2 has no cars The price of others goods M is unity

Asymmetrical Information Income of type 1 traders Income of type 2 traders The demand for used cars will be the sum of the demands of both groups

Asymmetrical Information

Symmetrical Information Suppose that the quality of all cars is uniformly distributed,

Examples and Applications Insurance The Employment of Minorities The Costs of Dishonesty Credit Markets in Underdeveloped Countries

Insurance people over 65 have great difficulty in buying medical insurance. –The natural question arises: why doesn't the price rise to match the risk?

Adverse Selection insurance textbooks –Generally speaking policies are not available at ages materially greater than sixty-five.... The term prcmiums are too high for any but the most pessimistic (which is to say the least healthy) insureds to find attractive. Thus there is a severe problem of adverse selection at these ages.

Insurance Group insurance welfare economics

The Employment of Minorities profit maximization Good quality schooling ＝ Good substitute

The Employment of Minorities T. W. Schultz writes, –"The educational establishment discovers and cultivates potential talent. The capabilities of children and mature students can never be known until found and cultivated."

The Employment of Minorities George Stigler – "in a regime of ignorance Enrico Fermi would have been a gardener, Von Neumann a checkout clerk at a drugstore."

The Costs of Dishonesty Dishonesty in business is a serious problem in underdeveloped countries.

Credit Markets in Underdeveloped Countries India –managing agencies Cooperative Movement

Credit Markets in Underdeveloped Countries

Counteracting Institutions guarantees brand-name chains –hamburger interurban highways license –doctors, lawyers, and barbers

Conclusion TRUST game theorists

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The Market for "Lemons": Quality Uncertainty and the Market Mechanism THANK YOU 淡江大學資訊管理研究所在職專班 陳雅玲 許瀞文