The document discusses George Akerlof's 'lemons theory' regarding market dynamics influenced by quality uncertainty and information asymmetry. It highlights how poor quality goods ('lemons') drive out high quality ones due to buyers' inability to discern differences, creating adverse selection. Various real-life examples, along with proposed regulatory mechanisms like guarantees and branding, are presented to address these market failures.

1. THE MARKET FOR “LEMONS:
QUALITY UNCERTAINTY AND
THE MARKET MECHANISM
George A. Akerlof
Economic Assessment of Urban
Transformations
Elsedawy Yasser
Karaka Zulal
Regazzetti Valentin
Visone Valeria

2. 1. INTRODUCTION
1950 1960 1970 1980 1990
STAGNATION PHENOMENON:
High inflation rate + Low economic growth rate = MARKET STANDSTILL
USA
WHY ? Strong relation between quality of goods and uncertainty of the Market
MAIN TOPICS:
Determination of the cost of lack of information on the market, causing dishonest behaviours and:
• Determining the economic cost of dishonesty;
• Explaining the arising of regulatory institutions.
METHODOLOGY DISCUSSIONRESULTS AND CONCLUSIONS
HISTORICAL BACKGROUND:

3. 2.
ARGUMENTATION:
Real life examples of adverse selection
Comparison between symmetrical and asymmetrical
information explained through utility functions
INTRODUCTION METHODOLOGY DISCUSSIONRESULTS AND CONCLUSIONS
The author, claims that due to information asymmetries, “bad money tend to drive out the good from the market”.
He explains this phenomenon providing:
1. Theoretical data:
2. Empirical data:

4. 2.
THE AUTOMOBILE MARKET:
“LEMONS THEORY”
INSURANCE MINORITIES’ EMPLOYMENT
• Sellers are more informed
then buyers about the
quality
• Good and bad cars sell at
the same price
• Bad cars tend to drive out
from the market the good
ones. Therefore, reducing
the overall Average
quality
• Thus, bad money force
good money out
• Buyers are more
informed than sellers
about the quality
• People over 65 face
difficulties in buying
medical insurances
• The average medical
condition of insurance
applicants deteriorates as
the price level rises
• Price doesn’t match risks
• Minority groups are low
hired for certain jobs
• The reason is the
unreliability of the
educational
establishments in
disadvantaged areas
• The employers rational
decision is not to hire
these people because it is
difficult to assess their
qualification level
Three examples of adverse selection:
INTRODUCTION METHODOLOGY DISCUSSIONRESULTS AND CONCLUSIONS

5. 3.
Both sides of the market pay the cost of dishonesty:
Demand Supply
• Loss faced by the purchaser due to the
lack of information
• Buyers become defensive
• Loss faced by the good seller being forced out of
the market.
• Sellers become predatory
Institutions arise to balance the effects of quality uncertainty
1. Guarantees: to ensure the buyer some normal expected quality;
2. Brand-name | chains: to give the consumer a mean of retaliation if quality does not meet expectations;
3. Licensing: to guarantee certain levels of proficiency.
Distinguishing good from bad quality goods on
the market is one of the most important aspects
of uncertainty
Economic institutions are necessary to regulate
the market
INTRODUCTION METHODOLOGY DISCUSSIONRESULTS AND CONCLUSIONS
RESULTS:
PROPOSED SOLUTIONS:
CONCLUSION:

6. 4.
S W O
Concrete and clear
examples
No innovation,
repetitive
Possible
implementation
through real data
Strongly highlights the
problem
No implementing
solution provided
Strong argumentation
to be implemented
No accurate
conclusions
On-point, intuitive
dissertation
Introducing an
abstract, improving
conclusions
Practical validation through real
market trends
Not applicable on all
the cases
Use of an applied
methodology
Elaborate other
methodologies
INTRODUCTION METHODOLOGY DISCUSSIONRESULTS AND CONCLUSIONS
Provide more innovative and
realistic conclusions
No explanation about the other
side of information
asymmetries: hidden action
Develop a methodology
applicable also to intangible
goods

7. THANKS FOR THE ATTENTION!