Ethics, Adverse Selection, Target Method of Sale Strategies, and Akerlof’s “Lemons” Problem

This study examines the acquisition dynamics associated with the target management’s choice to initiate the sale of the firm using the auction method. Specifically, we examine opportunistic merger and acquisition (M&A) dynamics related to the target-initiated method-of-sale decision (auctions vs. one-on-one negotiations), as a noteworthy example of Akerlof’s (1970) theory of the market for lemons. While we find a strong positive relationship between proxies of adverse selection risk and the likelihood of target initiation, robustness tests suggest target initiation itself is a unique indicator of information asymmetry in an acquisition environment. We also find that most target-initiated transactions follow an auction as the method of sale, which increases target information asymmetry advantages. While wealth accrued to both bidders and targets increases in non-target-initiated auctions, this benefit disappears when the target initiates the acquisition, causing both bidders and targets to suffer wealth losses. According to Akerlof’s theory, these wealth losses represent the cost of perceived dishonesty due to enhanced adverse section risk, which provides noteworthy implications for both business and society.

Competition and Price Transparency in the Market for Lemons: Experimental Evidence

In markets with asymmetric information, where equilibria are often inefficient, bargaining can help promote welfare. We design an experiment to examine the impact of competition and price transparency in such settings. Consistent with the theoretical predictions, we find that competition promotes efficiency if bargainers cannot observe each other’s price offers. Contrary to the predictions, however, the efficiency-enhancing effect of competition persists even when offers are observable. We explore different behavioral explanations for the absence of a detrimental effect of price transparency. Remarkably, implementing the strategy method improves subjects’ conditional reasoning, delivering the predicted loss in efficiency when offers are observable. (JEL C78, D82, L15)

Is the local wheat market a ‘market for lemons’? Certifying the supply of individual wheat farmers in Ethiopia

Bulking and mixing of smallholder supply dilutes incentives to supply high quality. We introduce wheat ‘grading and certification shops’ in Ethiopia and use an auction design to gauge willingness-to-pay (WTP) for certification. Bids correlate positively with wheat quality, and ex ante notification of the opportunity of certification improves wheat quality. These findings suggest that local wheat markets resemble a ‘market for lemons’, crippled by asymmetric information. However, aggregate WTP for grading and certification services does not re-coup the sum of fixed, flow and variable costs associated with running a single certification shop.

On the market for “Lemons”: quality provision in markets with asymmetric information

Akerlof’s “Lemons” paper provides a seminal economic result suggesting that, in markets with asymmetric information where product quality is unobservable by consumers prior to purchase and use, the introduction of a low-quality product will drive its higher quality counterpart(s) out of the market. In this paper we identify some empirically relevant cases/conditions under which the introduction of a low-quality product does not drive its higher quality substitutes out of the market but, instead, ends-up coexisting with them.

CORPORATE GOVERNANCE, DISCLOSURE DAN GENERAL EQUILIBRIUM TERHADAP ASYMMETRY INFORMATION - PERSPEKTIF EKONOMI MIKRO DAN PERSPEKTIF AKUNTANSI

Paper ini merupakan review literatur tentang topik empiris terkait Corporate Governance, Disclosure dan General Equilibrium terhadap Asymmetry Information Perspektif Ekonomi Mikro dan Perspektif Akuntansi. Penulis mengambil tema tersebut dilatarbelakangi adanya fenomena isu Asymmetry Information yang berkembang pada pasar persaingan tidak sempurna sehingga yang terjadi pasar gagal dalam memproduksi hasil yang efisien dan tidak bisa menjelaskan berbagai kondisi teoritis yang dibutuhkan bagi suatu pasar dengan persaingan sempurna. George Akerlof menggunakan istilah informasi asimetris dalam karyanya tahun 1970an disebut The Market for Lemons. Akerlof menyadari bahwa dalam pasar seperti itu, nilai rata-rata dari komoditas cenderung lebih menurun, bahkan untuk kualitas yang sangat sempurna kebalikannya, karena para pembeli tidak mempunyai cara untuk mengetahui apakah produk yang mereka beli akan menjadi sebuah “lemon” (produk yang menyesatkan). Dapat dikatakan bahwa penjual lebih tahu daripada pembeli sehingga muncullah teori ketidakpastian kualitas.