Book contents
- Frontmatter
- Contents
- Acknowledgments
- 1 Introduction
- 2 The market for “lemons”: quality uncertainty and the market mechanism
- 3 The economics of caste and of the rat race and other woeful tales
- 4 The economics of “tagging” as applied to the optimal income tax, welfare programs, and manpower planning
- 5 A theory of social custom, of which unemployment may be one consequence
- 6 Jobs as dam sites
- 7 The economic consequences of cognitive dissonance with William T. Dickens
- 8 Labor contracts as partial gift exchange
- 9 Loyalty filters
- Index
2 - The market for “lemons”: quality uncertainty and the market mechanism
Published online by Cambridge University Press: 18 December 2009
- Frontmatter
- Contents
- Acknowledgments
- 1 Introduction
- 2 The market for “lemons”: quality uncertainty and the market mechanism
- 3 The economics of caste and of the rat race and other woeful tales
- 4 The economics of “tagging” as applied to the optimal income tax, welfare programs, and manpower planning
- 5 A theory of social custom, of which unemployment may be one consequence
- 6 Jobs as dam sites
- 7 The economic consequences of cognitive dissonance with William T. Dickens
- 8 Labor contracts as partial gift exchange
- 9 Loyalty filters
- Index
Summary
Introduction
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 struggling attempt to give structure to the statement: “Business in underdeveloped countries is difficult”; in particular, a structure is given for determining the economic costs of dishonesty. Additional applications of the theory include comments on the structure of money markets, on the notion of “insurability,” on the liquidity of durables, 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 therefore concentrations of power – with ill consequences of their own – can develop.
- Type
- Chapter
- Information
- An Economic Theorist's Book of Tales , pp. 7 - 22Publisher: Cambridge University PressPrint publication year: 1984
- 19
- Cited by