Glamor Economics

Chapter 32

Chapter 5, Section 4 Behind Bad Money Driving Out Good Money——Lemon Market

The lemon market is an important case in economics, reflecting a decision-making problem under asymmetric information.Akerlof published a paper called "The Market for Lemons: Quality Uncertainty and Market Mechanisms" in 1970, and he himself won the Nobel Prize in Economics in 2002. "Lemon" means "shoddy product" or "bad thing" in American slang, and "lemon market" is also a market for second-hand products.Economists refer to commodities and markets with low transaction rates as "lemon markets."In this paper, Akeroff cites the well-known example of the used car market.

There is a second-hand car market, and although the cars in it look similar on the surface, the quality varies greatly.Sellers have a good idea of ​​the quality of their cars, but buyers have no way of knowing.Assuming that the quality of cars is evenly distributed from good to bad, and the price of the best car is 50 yuan, how much is the buyer willing to pay for a car whose quality he does not know?The most normal bid is 25 yuan.Obviously, in this way, the owner of a good car with a price of more than 25 yuan will no longer sell his car in this market.So it enters into a vicious circle. When car buyers find that half of the cars have withdrawn from the market, they will judge that the rest are cars of below-average quality, so the buyer's bid will drop to 15. The response to this is to once again withdraw cars with a quality above 15 yuan from the market.By analogy, the number of good cars on the market will become less and less, which will eventually lead to the collapse of this second-hand car market.

This is a typical lemon market.People who buy used cars do not know the quality of all the cars on the market, but the sellers know the quality of all the cars, but in order to get a good price and sell more cars, the sellers will definitely conceal the performance, operating information and Whether there is an accident or not.Therefore, information sharing cannot be realized between buyers and sellers, and sellers always have more information than buyers.Buyers, on the other hand, feel that all cars cannot be trusted, and it is difficult to decide whether to buy or not. The only solution seems to be to desperately lower the price.In this way, the seller will definitely not agree, thinking that his car is so good, how can he let you drive away at such a cheap price?If the price is raised and the buyer disagrees, who knows what accidents happened to your car?

In desperation, sellers either sell at a low price, or drive their good cars out of the second-hand car market. If things go on like this, there are fewer and fewer good cars in the second-hand car market.At this time, the reputation of low price and poor quality will spread farther and farther, and the bids of people who come to buy cars will only get lower and lower.The result of this vicious cycle is that all the bad cars drive the good cars out of the used car market, so the lemon market is full of cheap second-hand products.

The conclusion drawn by the traditional market competition mechanism is "survival of the fittest". However, in the case of information asymmetry, the operation of the market may be inefficient, and the conclusion that "bad money drives out good money" will be drawn.Product quality is related to price, higher price induces higher quality, lower price leads to lower quality. "Bad money drives out good money" makes the phenomenon that price determines quality in the market, because buyers cannot grasp the real information of product quality.

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Bad money drives out good money is a classic theory in economics.

In the 16th century, British commercial trade was already very developed, and some coins with insufficient fineness (that is, insufficient value) were minted and put into circulation.Thomas, a financier and businessman who was valued by the royal family in England at that time?Gresham found that when coins with the same face value but different actual values ​​entered circulation at the same time, people would hoard the full value of the coins, either melt them down or circulate them abroad, and finally returned to Britain to pay for trade and circulation, it was those The "bad money" of insufficient value caused great losses to Britain.In view of this, Gresham suggested to Elizabeth I that the British coin should be restored to a sufficient quality to restore the credibility of the Queen of England and the credibility of British merchants, so as not to be "expelled" in trade by coins of insufficient value.

(End of this chapter)