Uncertain Product Quality: The Market for Lemons with an Imperfect Testing Technology

Robert Heinkel

Bell Journal of Economics, 1981, vol. 12, issue 2, 625-636

Abstract: In a product market with consumer uncertainty regarding product quality, many regulatory policies may prove beneficial. This article examines the policy implications of administering an ex post imperfect quality test with potential seller liability. The key policy variables are the size of the liability, the confidence level of the test, and the degree of test imperfection, or noise. The model results demonstrate how the policy variables affect seller incentives and, therefore, total welfare. For example, minimizing the amount of noise in the test need not maximize welfare.

Date: 1981
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