Information and the Market for Lemons

Jonathan Levin

Working Papers from Stanford University, Department of Economics

Abstract: March 2001

This paper revisits Akerlof's (1970) classic adverse selection market and asks the following question: do greater information asymmetries reduce the gains from trade? Perhaps surprisingly, the answer is no. Better information on the selling side worsens the "buyer's curse," thus lowering demand, but may shift supply as well. Whether trade increases or decreases depends on the relative sizes of these effects. A characterization is given. On the other hand, improving the buyer's information --- i.e. making private information public --- unambiguously improves trade so long as market demand is downward sloping.

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Date: 2001-03
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Journal Article: Information and the Market for Lemons (2001)
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