Information and the Market for Lemons

Jonathan Levin

RAND Journal of Economics, 2001, vol. 32, issue 4, 657-66

Abstract: This article 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 characterisation 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. Copyright 2001 by the RAND Corporation.

Date: 2001
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