The Market for Lemons

The Market for Lemons: Quality Uncertainty and the Market Mechanism (1970) is an essay by the American economist George A. Akerlof ( Alfred Nobel Memorial Prize 2001), in which he describes the so-called Lemons problem (English for problem of Monday cars ) developed.

The market for lemons is a special problem of asymmetrical information , called hidden characteristics . These hidden characteristics mean that a buyer does not know or cannot assess the quality of the product offered before signing a contract. Without the right information, optimal decisions cannot be made.

George Akerlof was the first to investigate the effects of asymmetrical information on product quality: If buyers have difficulty assessing goods in terms of product quality, on average they will pay less than they would pay if they only chose from easily assessed goods of high product quality could. They take into account the risk of catching a " lemon ". This can explain the market displacement of providers of high product quality with necessarily higher prices.

Eliminating the so-called information asymmetry serves as a solution, but it is associated with additional costs. Furthermore, the suppliers with high quality can also produce products of lower quality in order not to be forced out of the market.

example

Akerlof illustrated the Lemons problem using the market for used cars . Lemon is a slang term in the USA for a car with repeated mechanical problems ( Monday car ).

Since buyers of used cars cannot (if at all) assess the quality of the vehicles on offer free of charge, they would , for example, form an expected value for the quality of the car in a market in which both good and bad used cars (“ lemons ”) are on offer . However, this price is below the reservation price of (some) the providers of good cars ( plums ). These vendors are unwilling to sell at this price and will leave the market. This systematically pushes the suppliers of good used cars out of the market, so that in the end only bad used cars would be offered.

In this case, the market collapses completely ( market failure ). You can prevent the collapse, but the elimination or mitigation of the information asymmetry causes costs (e.g. TÜV / DEKRA seal for used cars, extensive test drives). In the other cases of asymmetrical information, too, there is a deviation from the efficient solution with complete information; in the context of the principal-agent theory , these costs are referred to as agency costs .

meaning

• “The Market for Lemons” triggered a paradigm shift in economic research, which is still relevant today as New Institutional Economics .
• The political scientist Robert Keohane helped Akerlof text in the development of the approach of the neo-liberal institutionalism .

See also

• Lemon Laws

literature

• GA Akerlof: The Market for Lemons: Quality Uncertainty and the Market Mechanism . In: Quarterly Journal of Economics . tape 84 , no. 3 , 1970, p. 488-500 .
• Hans-Werner Sinn : When banks trade in lemons , Börsenzeitung No. 81, April 26, 2008 ( Ifo Viewpoint No. 94 )

Individual evidence

1. ↑ Horst Demmler: Fundamentals of Microeconomics, 4th ed. 2000, p. 220 f.
2. ↑ Akerlof - personal article at the Gabler Wirtschaftslexikon
3. ↑ Prof. Dr. Robert S. Pindyck, Prof. Dr. Daniel L. Rubinfeld: Microeconomics . Addison-Wesley Verlag; Edition: 7th edition (August 17, 2009). ISBN 3827372828 . Page 800/801
4. ↑ " Lemon " as a metaphor of a sour, not very tasty fruit, a suboptimal harvest or purchase.
5. ↑ Conversations with History: Robert O. Keohane , at 6:10 pm, on YouTube . Retrieved November 22, 2016.