The Market for Lemons

A 1970 paper by George Akerlof about how Information asymmetry between sellers and buyers can cause markets to worsen or even collapse

Here's how the "market for lemons" works

There are good used cars (“peaches”) and bad ones (“lemons”).

Sellers know which is which. Buyers can’t tell; they only know the overall distribution of quality in the market.

If buyers can’t distinguish quality, they’re only willing to pay a price that reflects average quality.

At that average price, owners of high-quality cars decide it’s not worth selling (because they know their car is better than “average”).

They withdraw from the market. This lowers the average quality of cars left in the market.

Buyers, rationally, lower the price they’re willing to pay even further.

This can spiral until only the worst products (“lemons”) remain or, in the extreme, the market collapses entirely.

These problems can be mitigated by Information symmetry where sellers and buyers both know as much as possible about the thing

This has developed into an entire field called Information economics

This has further developed in the following way

Michael Spense looked at the "information-haver" side into "signaling" i.e. how informed agents can credibly communicate their type

For example, education is a signal of productivity. it's hard to directly measure productivity, so employers use education as a proxy, since it's easier/cheaper for high-productivity workers to get a degree (smarter, more organized, they qualify for scholarships, etc.)

Joseph Stiglitz looked at the "less-informed side" - employers and insurance companies can design a "menu of contracts" to get people to reveal themselves: i.e. high deductible + low premium vs low deductible + high premium

All of this applies to the following fields

Contract theory and mechanism design

Auctions: private valuations, winner's curse, bidding strategies

Corporate finance: debt vs equity, pecking order theory, etc

Banking and crises: Bank runs and panics tend to have a strong info-asymmetry component

Digital marketplaces and algorithmic pricing: Platforms have insane info advantages over users, research into new adverse-selection or exploitation problems

WeWrite could be used to Connect all the dots and bring about information symmetry in the whole economy, driving all prices down to zero / the cost of energy, since Your margin is my opportunity and everyone's engaged in the Race to the bottom thanks to the market mechanisms