This can help to alleviate the asymmetry of information between them. If sellers do that consistently, then buyers will gain trust in the sellers that price is in fact related to quality. When that happens, the market can function because buyers can be fairly certain of their utility.
What this refers to is the cost of dishonesty. In used cars, dishonesty will drive away business, so any car lot with an interest in long-term success must ensure that the costs of dishonesty are reduced by reducing dishonesty itself. He then likens the lemon market to the cost of doing business in a country with high levels of corruption. Firms are discouraged from investing in places where information asymmetry means that they cannot distinguish between a good business opportunity and a scam. Thus, again, encouraging a lack of corruption would be the best pathway to successful business promotion, just as it is on a used car lot.
Conclusion
Akerhof shows with the used car example how high the costs of dishonesty can be. For those in public policy or in business, this is an important finding. When dishonesty is likened to information asymmetry, the...
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