Cake-Eating with Private Information
We consider a model of cake-eating with private information. The model captures phenomena such as trust and "security of supply" in resource-use relationships. It also predicts supply shocks as an equilibrium phenomenon: privately informed sellers have incentives to reveal resource scarcity too late, through a supply disruption, after which they exploit the consumersâ€™ inability to immediately adjust demand. Two puzzles that a standard exhaustible-resource theory cannot explain are resolved: sellers have an incentive to overstate their resources rather than emphasize scarcity, and consumers can switch to alternatives before exhausting the resource thereby leaving socially valuable resource in the ground.
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- George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
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