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Uncertain Product Quality: The Market for Lemons with an Imperfect Testing Technology

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  • Robert Heinkel

Abstract

In a product market with consumer uncertainty regarding product quality, many regulatory policies may prove beneficial. This article examines the policy implications of administering an ex post imperfect quality test with potential seller liability. The key policy variables are the size of the liability, the confidence level of the test, and the degree of test imperfection, or noise. The model results demonstrate how the policy variables affect seller incentives and, therefore, total welfare. For example, minimizing the amount of noise in the test need not maximize welfare.

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  • Robert Heinkel, 1981. "Uncertain Product Quality: The Market for Lemons with an Imperfect Testing Technology," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 625-636, Autumn.
    • Handle: RePEc:rje:bellje:v:12:y:1981:i:autumn:p:625-636
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    Cited by:

    1. Chalfant, James A. & James, Jennifer S. & Lavoie, Nathalie & Sexton, Richard J., 1999. "Asymmetric Grading Error And Adverse Selection: Lemons In The California Prune Industry," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(1), pages 1-23, July.
    2. Mamada, Robert, 2022. "The market for lemons and information theory," Mathematical Social Sciences, Elsevier, vol. 120(C), pages 107-112.
    3. Gu, Yiquan, 2008. "Imperfect Certification," Ruhr Economic Papers 78, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    4. Hsu, Bo-Xiang & Chen, Yi-Min & Chen, Li-An (Leann), 2022. "Corporate social responsibility and value added in the supply chain: Model and mechanism," Technological Forecasting and Social Change, Elsevier, vol. 174(C).
    5. repec:zbw:rwirep:0078 is not listed on IDEAS
    6. H. Naci Mocan, 2001. "Can Consumers Detect Lemons? Information Asymmetry in the Market for Child Care," NBER Working Papers 8291, National Bureau of Economic Research, Inc.
    7. Yiquan Gu, 2008. "Imperfect Certification," Ruhr Economic Papers 0078, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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