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Lemons & Loons

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  • Timothy Perri

Abstract

Akerlof (2012, 2013) has argued individuals often do not behave according to rational expectations. He shows how buyers in a complete lemon’s market are worse off if they behave irrationally---like loons. We examine several different lemon’s market situations (including when workers may signal or be screened to reveal their quality) to determine the effects on welfare for loons and for society as a whole. Sometimes there are opposite effects for welfare for society and loons. Also, in some cases, both society and loons are better off due to loony behavior. Key Words: Lemons, asymmetric information, and signaling

Suggested Citation

  • Timothy Perri, 2013. "Lemons & Loons," Working Papers 13-09, Department of Economics, Appalachian State University.
    • Handle: RePEc:apl:wpaper:13-09
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    File URL: http://econ.appstate.edu/RePEc/pdf/wp1309.pdf
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    References listed on IDEAS

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    1. Mailath George J. & Okuno-Fujiwara Masahiro & Postlewaite Andrew, 1993. "Belief-Based Refinements in Signalling Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 241-276, August.
    2. Karl–Gustaf Lofgren & Torsten Persson & Jorgen W. Weibull, 2002. "Markets with Asymmetric Information: The Contributions of George Akerlof, Michael Spence and Joseph Stiglitz," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(2), pages 195-211, June.
    3. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-359, March.
    4. Michael Spence, 2002. "Signaling in Retrospect and the Informational Structure of Markets," American Economic Review, American Economic Association, vol. 92(3), pages 434-459, June.
    5. Timothy Perri, 2011. "Spence Revisited: Signaling and the Allocation of Individuals to Jobs," Working Papers 11-16, Department of Economics, Appalachian State University.
    6. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-431, July.
    7. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    8. Barzel, Yoram, 1977. "Some Fallacies in the Interpretation of Information Costs," Journal of Law and Economics, University of Chicago Press, vol. 20(2), pages 291-307, October.
    9. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    10. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
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    Cited by:

    1. Timothy Perri, 2019. "Signaling and optimal sorting," Journal of Economics, Springer, vol. 126(2), pages 135-151, March.

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    More about this item

    Keywords

    lemons; asymmetric information; and signaling;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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