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The Market for “Lemons”: Quality Uncertainty and the Market Mechanism

  • G. Akerlof
Chapter

Abstract

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 under-developed 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.

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Notes

  1. 3.
    O. D. Dickerson, Health Insurance (Homewood, Ill.: Irwin, 1959), p. 333.Google Scholar
  2. 4.
    O. W. Anderson (with J. J. Feldman), Family Medical Costs and Insurance (New York: McGraw-Hill, 1956).Google Scholar
  3. 5.
    H. S. Denenberg, R. D. Eilers, G. W. Hoffman, C. A. Kline, J. J. Melone, and H. W. Snider, Risk and Insurance (Englewood Cliffs, N.J.: Prentice Hall, 1964), p. 446.Google Scholar
  4. 6.
    The following quote, again taken from an insurance textbook, shows how far the medical insurance market is from perfect competition:...insurance companies must screen their applicants. Naturally it is true that many people will voluntarily seek adequate insurance on their own initiative. But in such lines as accident and health insurance, companies are likely to give a second look to persons who voluntarily seek insurance without being approached by an agent. (F. J. Angell, Insurance, Principles and Practices, New York: The Ronald Press, 1957, pp. 8–9.)Google Scholar
  5. 7.
    T. W. Schultz, The Economic Value of Education (New York: Columbia University Press, 1964), p. 42.Google Scholar
  6. 8.
    G. J. Stigler, “Information and the Labor Market,” Journal of Political Economy, Vol. 70 (Oct. 1962), Supplement, p. 104.CrossRefGoogle Scholar
  7. 10.
    See M. J. Levy, Jr., “Contrasting Factors in the Modernization of China and Japan,” in Economic Growth: Brazil, India, Japan, ed. S. Kuznets et al. (Durham, NC: Duke University Press, 1955).Google Scholar
  8. 11.
    C. P. Kindleberger, Economic Development (New York: McGraw-Hill, 1958), p. 86.Google Scholar
  9. 12.
    For example, see W. Arthur Lewis, The Theory of Economic Growth (Homewood, Ill.: Irwin, 1955), p. 196.Google Scholar
  10. 14.
    H. Tinker, South Asia: A Short History (New York: Praeger, 1966), p. 134.Google Scholar
  11. Source: M. M. Mehta, Structure of Indian Industries (Bombay: Popular Book Depot, 1955), p. 314.Google Scholar
  12. Also, for the cotton industry see H. Fukuzawa, “Cotton Mill Industry,” in V. B. Singh, editor, Economic History of India, 1857–1956 (Bombay: Allied Publishers, 1965).Google Scholar
  13. 16.
    For the mixed record of industrial profit, see D. H. Buchanan, The Development of Capitalist Enterprise in India (New York: Kelley, 1966Google Scholar

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© Macmillan Publishers Limited 1995

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  • G. Akerlof

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