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The market for 'lemons': quality uncertainty and the market mechanism

01 Jan 2002-Research Papers in Economics (Edward Elgar Publishing)-
TL;DR: In this article, the allocation of credit in a market in which borrowers have greater information concerning their own riskiness than do lenders is examined and the authors suggest a role for government as the lender of last resort.
Abstract: This paper examines the allocation of credit in a market in which borrowers have greater information concerning their own riskiness than do lenders. It illustrates that (1)the allocation of credit is inefficient and at times can be improved by government intervention, and (2) small changes in the exogenous risk-free interest rate can cause large (discontinuous) changes in the allocation of credit and the efficiency of the market equilibrium. These conclusions suggests a role for government as the lender of last resort.
Citations
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Journal ArticleDOI
TL;DR: Results show that internal human and technology-based manufacturing sources are positively associated with successful TC and formal and informal integration mechanisms also significantly moderate the relationships observed between capability sources and TC.
Abstract: In recent years, companies have increased their use of internal and external sources in pursuit of a competitive advantage through the effective and timely commercialization of new technology. Grounded in the resource-based view of the firm, this study examines the effect of a company's use of internal and external sources on multiple dimensions of successful technology commercialization (TC). The study also explores the moderating role of formal vs. informal integration mechanisms on these relationships. Applying a longitudinal design and data from 119 companies, the results show that internal human and technology-based manufacturing sources are positively associated with successful TC. Formal and informal integration mechanisms also significantly moderate the relationships observed between capability sources and TC. Copyright © 2002 John Wiley & Sons, Ltd.

705 citations

Journal ArticleDOI
TL;DR: The theory of market signaling and screening is a cornerstone of the new economics of information as discussed by the authors, and it has been used extensively in industrial organization, labor, and finance, among others.
Abstract: The theory of market signaling and screening is a cornerstone of the new economics of information. The last two and a half decades have not only witnessed a series of remarkable theoretical developments but also a wide range of applications. This essay examines the key theoretical issues and explores their use in three major fields: industrial organization, labor, and finance. Considerable emphasis is placed on attempts to test the theory in each of these fields.

671 citations


Cites background from "The market for 'lemons': quality un..."

  • ...For related papers applying this principle, see Gunther Franke (1987), Thomas Noe (1989), M. P. Narayaman (1988), George Constantinedes and Bruce Grundy (1990), and Gautam Goswami, Noe, and Michael Rebello (1995)....

    [...]

  • ...Around the same time, George Akerlof (1970) showed how trade can almost completely collapse when agents on one side of a market know only the distribution of product quality, rather than the quality of each item traded.3 Finally Michael Spence (1973) asked whether, in a competitive marketplace, sellers of above-average quality products could “signal” this fact by taking some costly action....

    [...]

  • ...Akerlof (1970) provides the first formal model, illustrating how dramatically asymmetric information can affect equilibrium trades....

    [...]

  • ...Richard Layard and George Psacharopoulos (1974) compare earnings functions of students who achieve some educational credential (say a bachelor of arts degree) with those who do not....

    [...]

  • ...Around the same time, George Akerlof (1970) showed how trade can almost completely collapse when agents on one side of a market know only the distribution of product quality, rather than the quality of each item traded.3 Finally Michael Spence (1973) asked whether, in a competitive marketplace,…...

    [...]

Journal ArticleDOI
TL;DR: In this article, the authors provide evidence of advantageous selection in the Medigap insurance market and analyze its sources, including income, education, longevity expectations, and financial planning horizons, as well as cognitive ability.
Abstract: We provide evidence of advantageous selection in the Medigap insurance market and analyze its sources. Conditional on controls for Medigap prices, those with Medigap spend, on average, $4,000 less on medical care than those without. But if we condition on health, those with Medigap spend $2,000 more. The sources of this advantageous selection include income, education, longevity expectations, and financial planning horizons, as well as cognitive ability. Conditional on all these factors, those with higher expected medical expenditures are more likely to purchase Medigap. Risk preferences do not appear as a source of advantageous selection; cognitive ability is particularly important.

464 citations


Cites background or methods from "The market for 'lemons': quality un..."

  • ...In rows (3) and (11) we report results from a regression that includes risk tolerance, the predicted variance, and the interaction between the two....

    [...]

  • ...Again we focus on results in columns (1)-(3)....

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  • ...Columns (1) and (2) report results when they are coded as having Medigap; while in Columns (3) and (4) they are coded as missing....

    [...]

  • ...AB = R Q (p; ) pdF (p; ) R Q (p; ) dF (p; ) ; (3)...

    [...]

  • ...Columns 4–11 indicate the list of control variables included in X, with Y (N) indicating that a particular variable is (is not) included....

    [...]

Journal ArticleDOI
TL;DR: In this article, the authors explore how individual-level phenomena underpin isolating mechanisms that sustain human capital-based advantages but also create management dilemmas that must be resolved in order to create value.

463 citations


Cites background from "The market for 'lemons': quality un..."

  • ...Additional hiring challenges arise from the classic “market for lemons” adverse selection problem (Akerlof, 1970)....

    [...]

Posted Content
TL;DR: This study conceptualizes product uncertainty and examines its effects and antecedents in online markets for used cars (eBay Motors), and distinguishes between product and seller uncertainty, and shows that product uncertainty has a stronger effect on price premiums than seller uncertainty.
Abstract: Online markets pose a difficulty for evaluating products, particularly experience goods, such as used cars, that cannot be easily described online. This exacerbates product uncertainty, the buyer’s difficulty in evaluating product characteristics and predicting how a product will perform in the future. However, the IS literature has focused on seller uncertainty and ignored product uncertainty. To address this void, this study conceptualizes product uncertainty and examines its effects and antecedents in online markets for used cars (eBay Motors). Extending the information asymmetry literature from the seller to the product, we first theorize the nature and dimensions – description and performance – of product uncertainty. Second, we propose product uncertainty to be distinct from, yet shaped by, seller uncertainty. Third, we conjecture product uncertainty to negatively affect price premiums in online markets beyond seller uncertainty. Fourth, based on the information signaling literature, we describe how information signals – diagnostic product descriptions and third-party product assurances – reduce product uncertainty. The structural model is validated by a unique dataset comprised of secondary transaction data from used cars on eBay Motors matched with primary data from 331 buyers who bid upon these used cars. The results distinguish between product and seller uncertainty, show that product uncertainty has a stronger effect on price premiums than seller uncertainty, and identify the most influential information signals that reduce product uncertainty. The study’s implications for the emerging role of product uncertainty in online markets are discussed.

426 citations


Cites background or result from "The market for 'lemons': quality un..."

  • ...…literature essentially ignored product uncertainty and focused on seller uncertainty by assuming product uncertainty to arise from the seller’s unwillingness to truthfully describe the product to misrepresent a low-quality product (a lemon) for a high-quality one (a cherry) (Akerlof 1970)....

    [...]

  • ...…focused on mitigating the seller’s unwillingness to act cooperatively (seller uncertainty) with numerous solutions by focusing on mitigating the seller’s inability to describe the product with IT-enabled solutions and the seller’s unawareness of hidden defects with the aid of third-parties....

    [...]

  • ...Figure 1 presents the research model with the nature, consequences, and antecedents of product uncertainty....

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  • ...This may create a market of lemons that gives unfairly low prices to high-quality goods, thus driving them out of the market and reducing transaction activity below socially optimal levels (Akerlof 1970)....

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  • ...This is consistent with the literature that seller’s unwillingness is generally deemed as malicious in nature (Akerlof 1970)....

    [...]

References
More filters
Posted ContentDOI
TL;DR: In this paper, a model is developed to provide the first theoretical justification for true credit rationing in a loan market, where the amount of the loan and amount of collateral demanded affect the behavior and distribution of borrowers, and interest rates serve as screening devices for evaluating risk.
Abstract: According to basic economics, if demand exceeds supply, prices will rise, thus decreasing demand or increasing supply until demand and supply are in equilibrium; thus if prices do their job, rationing will not exist. However, credit rationing does exist. This paper demonstrates that even in equilibrium, credit rationing will exist in a loan market. Credit rationing is defined as occurring either (a) among loan applicants who appear identical, and some do and do not receive loans, even though the rejected applicants would pay higher interest rates; or (b) there are groups who, with a given credit supply, cannot obtain loans at any rate, even though with larger credit supply they would. A model is developed to provide the first theoretical justification for true credit rationing. The amount of the loan and the amount of collateral demanded affect the behavior and distribution of borrowers. Consequently, faced with increased credit demand, it may not be profitable to raise interest rates or collateral; instead banks deny loans to borrowers who are observationally indistinguishable from those receiving loans. It is not argued that credit rationing always occurs, but that it occurs under plausible assumptions about lender and borrower behavior. In the model, interest rates serve as screening devices for evaluating risk. Interest rates change the behavior (serve as incentive mechanism) for the borrower, increasing the relative attractiveness of riskier projects; banks ration credit, rather than increase rates when there is excess demand. Banks are shown not to increase collateral as a means of allocating credit; although collateral may have incentivizing effects, it may have adverse selection effects. Equity, nonlinear payment schedules, and contingency contracts may be introduced and yet there still may be rationing. The law of supply and demand is thus a result generated by specific assumptions and is model specific; credit rationing does exist. (TNM)

13,126 citations

Journal ArticleDOI
TL;DR: Results show that internal human and technology-based manufacturing sources are positively associated with successful TC and formal and informal integration mechanisms also significantly moderate the relationships observed between capability sources and TC.
Abstract: In recent years, companies have increased their use of internal and external sources in pursuit of a competitive advantage through the effective and timely commercialization of new technology. Grounded in the resource-based view of the firm, this study examines the effect of a company's use of internal and external sources on multiple dimensions of successful technology commercialization (TC). The study also explores the moderating role of formal vs. informal integration mechanisms on these relationships. Applying a longitudinal design and data from 119 companies, the results show that internal human and technology-based manufacturing sources are positively associated with successful TC. Formal and informal integration mechanisms also significantly moderate the relationships observed between capability sources and TC. Copyright © 2002 John Wiley & Sons, Ltd.

705 citations

Journal ArticleDOI
TL;DR: The theory of market signaling and screening is a cornerstone of the new economics of information as discussed by the authors, and it has been used extensively in industrial organization, labor, and finance, among others.
Abstract: The theory of market signaling and screening is a cornerstone of the new economics of information. The last two and a half decades have not only witnessed a series of remarkable theoretical developments but also a wide range of applications. This essay examines the key theoretical issues and explores their use in three major fields: industrial organization, labor, and finance. Considerable emphasis is placed on attempts to test the theory in each of these fields.

671 citations

Journal ArticleDOI
TL;DR: In this article, the authors explore how individual-level phenomena underpin isolating mechanisms that sustain human capital-based advantages but also create management dilemmas that must be resolved in order to create value.

463 citations

Posted Content
TL;DR: This study conceptualizes product uncertainty and examines its effects and antecedents in online markets for used cars (eBay Motors), and distinguishes between product and seller uncertainty, and shows that product uncertainty has a stronger effect on price premiums than seller uncertainty.
Abstract: Online markets pose a difficulty for evaluating products, particularly experience goods, such as used cars, that cannot be easily described online. This exacerbates product uncertainty, the buyer’s difficulty in evaluating product characteristics and predicting how a product will perform in the future. However, the IS literature has focused on seller uncertainty and ignored product uncertainty. To address this void, this study conceptualizes product uncertainty and examines its effects and antecedents in online markets for used cars (eBay Motors). Extending the information asymmetry literature from the seller to the product, we first theorize the nature and dimensions – description and performance – of product uncertainty. Second, we propose product uncertainty to be distinct from, yet shaped by, seller uncertainty. Third, we conjecture product uncertainty to negatively affect price premiums in online markets beyond seller uncertainty. Fourth, based on the information signaling literature, we describe how information signals – diagnostic product descriptions and third-party product assurances – reduce product uncertainty. The structural model is validated by a unique dataset comprised of secondary transaction data from used cars on eBay Motors matched with primary data from 331 buyers who bid upon these used cars. The results distinguish between product and seller uncertainty, show that product uncertainty has a stronger effect on price premiums than seller uncertainty, and identify the most influential information signals that reduce product uncertainty. The study’s implications for the emerging role of product uncertainty in online markets are discussed.

426 citations