Lemons Problem

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Dictionary Says

Definition of 'Lemons Problem'

The issue of information asymmetry between the buyer and seller of an investment or product. Lemons problem was popularized by a 1970 research paper by economist George Akerlof. The term is derived from Akerlof's demonstration of the concept of asymmetric information through the example of defective used cars, which are known as lemons in marketplace. In the investment field, the lemons problem is apparent in areas such as insurance and corporate finance.
Investopedia Says

Investopedia explains 'Lemons Problem'

Information asymmetry arises when the parties to a transaction do not have the same degree of information necessary to make an informed decision. For example, in the market for used cars, the buyer generally cannot ascertain the value of a vehicle accurately and may therefore only be willing to pay an average price for it, somewhere between a bargain price and a premium price.

However, this tilts the scales in favor of a lemon seller, since even an average price for this lemon would be higher than the price it would command if the buyer knew beforehand that it was indeed a lemon. This phenomenon also puts the seller of a good used car at a disadvantage, since the best price such a seller can expect is an average price, and not the premium price the car should command.
Search results for

'Lemons Problem'

  • How To Avoid Buying A "Lemon" Product

    http://www.investopedia.com/articles/pf/11/solutions-to-lemon-problem.asp
    ... TUTORIAL: Economics Basics The Lemons Problem The lemons problem theory states that
    certain industries are susceptible to asymmetric information, which can ...

  • Did You Buy A Lemon?

    http://www.investopedia.com/articles/pf/08/buy-a-lemon.asp
    ... the talk about lemons, figuring out whether or not you have one can be a whole lot
    harder than most people expect it to be, and getting the problem fixed can ...

  • Published Mutual Fund Returns Not Always What They Appear

    http://www.investopedia.com/articles/02/013002.asp
    ... But what happens to those inevitable lemons if the mutual fund industry ... professionals
    believe that creation bias is becoming a bigger problem than survivorship ...

  • The Hidden Differences Between Index Funds

    http://www.investopedia.com/articles/mutualfund/03/061103.asp
    ... Orange tasted like oranges and yellow tasted like lemons - but sometime later, the
    yellow jelly ... It's not a problem to want to buy a fund that tries to beat the ...

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