Reading notes from The Market For Lemons, by George A. Akerlof.
- The general theme is the effects of uncertainty of quality and asymmetric information in markets.
- When I buy a new car, there is a probability that it might be bad. Later, after I used it for a while, I have a better estimated probability if it's good or bad. Therefore, have better information. Given lack of information on the buyer's side, bad used cars will sell at the same price as good ones. If my car is bad, I am better off trading it, while if my car is good, I am better off keeping it.
- While this looks like Gresham's law (bad money drives out good money), the difference is: it's not just that Bad cars drive out good cars because they sell at the same price. With asymmetric information, bad cars drive out mediocre cars that drive out good cars that drive out great cars. This collapses the whole used car market.
- Insurance: No one wants to insure over 65ers at any price. Adverse selection.
- Employment of Minorities: employers may refuse to hire members of minority groups for certain works. Because it is difficult for be sure about the level of reliability of slum schools vs well-established ones, employers might not risk hiring a person from a minority.
- Costs of dishonesty: dishonest dealing tend to drive honest dealings out of the market. This in turn tends to drive the market out of existence.
- Some institutions exist because of this quality uncertainty: Guarantees (money-back, trial, etc). Brands. Chains (think hotel chains, supermarket chains). Licensing/Certification.
- The difficulty of separating good from bad is inherent in business. And may be the main reason of uncertainty.