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The Market for "Lemons": Quality Uncertainty and the Market Mechanism George A. Akerlof The Quarterly Journal of Economics, Vol. 84, No. 3. (Aug., 1970), pp. 488-500.
Stable URL: http://links.jstor.org/sici?sici=0033-5533%28197008%2984%3A3%3C488%3ATMF%22QU%3E2.0.CO%3B2-6 The Quarterly Journal of Economics is currently published by The MIT Press.

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http://www.jstor.orgTue Aug 21 08:30:15 2007

T H E MARKET FOR "LEMONS": QUALITY UNCERTAINTY AND T H E MARKET MECHANISM '

I. Introduction, 4 8 8 . ~ 1 1 . he model with automobiles as an example, T 489. - 111. Examples and applications, 492. - IV. Counteracting institutions, 499. -V. Conclusion, 500.

This paper relates quality and uncertainty. The existence of goods of many grades poses interesting andimportant problems for the theory of markets. On the one hand, the interaction of quality differences and uncertainty may explain important institutions of the labor market. On the other hand, this paper presents a struggling attempt to give structure to the statement: "Business in underdeveloped countries is difficult"; in particular, a structure is given for determining the economic costs ofdishonesty. Additional applications of the theory include comments on the structure of money markets, on the notion of "insurability," on the liquidity of dura b l e ~and on brand-name goods. , There are many markets in which buyers use some market statistic to judge the quality of prospective purchases. I n this case there is incentive for sellers to market poor quality merchandise, since the returns forgood quality accrue mainly to the entire group whose statistic is affected rather than to the individual seller. As a result there tends to be a reduction in the average quality of goods and also in the size of the market. It should also be perceived that in these markets social and private returns differ, and therefore, in some cases, governmental intervention may increase the welfare of allparties. Or private institutions may arise to take advantage of the potential increases in welfare which can accrue to all parties. By nature, however, these institutions are nonatomistic, and therefore concentrations of power -with ill consequences of their own can develop.
The author would especially like to thank Thomas Rothenberg for invaluable comments and inspiration. In addition he isindebted to Roy Radner, Albert Fishlow, Bernard Saffran, William D. Nordhaus, Giorgio La Malfa, Charles C. Holt, John Letiche, and the referee for help and suggestions. He would also like to thank the Indian Statistical Institute and the Ford Foundation for financial support.

M A R K E T F O R "LEMONS": A N D M A R K E T M E C H A N I S M

489

The automobile market is used as a finger exercise...