The Market for Lemons

How Information Contributes to Efficiency
http://knowledge.wpcarey.asu.edu/article.cfm?articleid=1846
Author: Knowledge@W.P. Carey
Source: Knowledge@W.P. Carey
Year: 2010

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Abstract:

Information is to an economy as gas is to a car: An auto can't run without it, and impurities in the fuel can thwart efficient operations.

Consider, for a moment, all of the many ways in which information contributes to the functioning of the economy. Investors need it to assess the quality of the issuers of stocks and bonds. Employers want it to evaluate potential employees. Consumers seek it to help them pick reliable products and trustworthy service providers. Colleges use it to pick the best applicants.

In the years leading up to the financial crisis: investors couldn't get accurate information on the quality of mortgage-backed bonds and related derivative securities and thus didn't know that their bonds were destined to default. In effect, bad information ended up contributing to the financial crisis and the recession.



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