Modern finance · 1950s–1990s
1970
The market for lemons
George Akerlof shows how hidden quality can break a market.
Akerlof's 1970 paper showed that when sellers of used cars know more than buyers, buyers pay only an average price, good cars leave the market and quality falls.
💡 Why it made sense then
It explained why warranties, inspections and disclosure rules exist.
Ideas it gave us
- 🏗️ Information asymmetry
Information asymmetry is when one side of a deal knows more than the other. It can cause adverse selection, where bad products or risks drive out good ones.
Practise with $10,000 in play money
Free. No real money involved.