Lemons & Loons

Timothy Perri
2016 Review of Behavioral Economics  
Akerlof (2012 Akerlof ( , 2013 and Akerlof and Tong (2013) argue 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. We examine several different situations with asymmetric information (including when workers may signal or be screened to reveal their quality) to determine the effects on welfare for loons and for society as a whole. Sometimes there are opposite effects
more » ... opposite effects for welfare for society and loons. Also, in some cases, both society and loons are better off due to loony behavior.
doi:10.1561/105.00000049 fatcat:swph5kh3pja3vhztkebkpgdene