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I wonder if there's a tipping point in information asymmetry where the theory becomes irrelevant. Sellers will almost always have more information than buyers a
by padobson 8y ago
I wonder if there's a tipping point in information asymmetry where the theory becomes irrelevant. Sellers will almost always have more information than buyers about a specific instance of a product, but there comes a point in a market where buyers have ENOUGH information to avoid buying a lemon, and so can adjust their offer based on that information and disrupt the feedback loop that drives peach owners out of the market.
As an example, you probably could have done very well for yourself in 2009 buying mortgage-backed securities that didn't include any subprime loans. The securities may have had other problems, but at some point there was enough information available to stop buying the lemon securities for subprime loans and pay a bit more than p.avg for the security if it wasn't backed by subprime loans. Information asymmetry still exists, but there's enough information available to avoid making a catastrophic purchase.
So it's almost like the market for lemons is forced to self-correct, because the quality of the product in the market will necessarily drop until it becomes obvious to the buyers what attributes distinguish between a lemon and a peach.
So maybe the chief lesson in The Market for Lemons is if it looks like a market is all peaches, you shouldn't buy anything at all until you've found a few lemons, and there's money to be made in that market if you can distinguish between peaches and lemons before anyone else.
So is information asymmetry really just a market opportunity for a savvy buyer?
- notahacker 8y ago> So is information asymmetry really just a market opportunity for a savvy buyer? Of course it can be (the savvy buyer is the one who's not suffering from the information asymmetry to the same degree) provided you're either not expecting to resell or expect the information you're acting on to be more widely available when you resell. If you can reliably identify a particular car hasn't got a particular issue its model is notorious for by knowing what to look at, you'll get a better price, assuming at least some people owning examples of the car without the issue still sell their cars. If you've got a better risk model, you'll be able to profit from loans other institutions won't make. If you've got a better hiring process, you'll get staff who will accept lower wages and stick around for longer because other potential employers underestimate them. But not always. If you're in good health and well aware of it, you're still going to overpay for your health insurance because the insurance company can't perfectly evaluate your risk (conversely the health insurance is still a good deal if you're in poor health even if you're entirely ignorant of your mounting health issues). And sometimes the difference between a lemon and a peach just isn't going to be evident until after the purchase.