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Lemons & Loons

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  • Perri, Timothy

Abstract

In Akerlof (2012, 2013), Akerlof and Tong (2013), and Akerlof and Shiller (2015), it is argued that individuals often do not behave according to rational expectations. They show how buyers in a complete lemons market are worse off if they behave irrationally – like loons. I examine different situations with asymmetric information (including when workers may signal or be screened to reveal their ability) to determine the effects on welfare for loons and for society. Sometimes there are opposite effects for welfare, for society and loons. It is also possible for society to gain when loons, on average, gain from loony behavior.

Suggested Citation

  • Perri, Timothy, 2016. "Lemons & Loons," Review of Behavioral Economics, now publishers, vol. 3(2), pages 173-188, July.
    • Handle: RePEc:now:jnlrbe:105.00000049
    DOI: 10.1561/105.00000049
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    References listed on IDEAS

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    1. Karl–Gustaf Lofgren & Torsten Persson & Jorgen W. Weibull, 2002. "Markets with Asymmetric Information: The Contributions of George Akerlof, Michael Spence and Joseph Stiglitz," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(2), pages 195-211, June.
    2. Michael Spence, 2002. "Signaling in Retrospect and the Informational Structure of Markets," American Economic Review, American Economic Association, vol. 92(3), pages 434-459, June.
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    4. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    5. Barzel, Yoram, 1977. "Some Fallacies in the Interpretation of Information Costs," Journal of Law and Economics, University of Chicago Press, vol. 20(2), pages 291-307, October.
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    7. Mailath George J. & Okuno-Fujiwara Masahiro & Postlewaite Andrew, 1993. "Belief-Based Refinements in Signalling Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 241-276, August.
    8. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-359, March.
    9. Timothy Perri, 2011. "Spence Revisited: Signaling and the Allocation of Individuals to Jobs," Working Papers 11-16, Department of Economics, Appalachian State University.
    10. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
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    Cited by:

    1. Timothy Perri, 2019. "Signaling and optimal sorting," Journal of Economics, Springer, vol. 126(2), pages 135-151, March.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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