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.

Reflections on the Political Economy of European Wine Appellations

Today’s European wine policy is centered on a system of appellations, implemented as geographical indications (GIs), that entail significant technological regulations—restricting the varieties that may be grown, while imposing maximum yields per hectare and other rules regarding grape production and winemaking practice. This paper outlines the historical development of European wine policy under the CAP, and presents a more detailed analysis of the economic consequences of the rules and regulations under the appellation system. The introduction of these rules and regulations was probably beneficial initially, both for their didactive effect on wine producers and consumers and as a way of overcoming a significant “lemons” problem in the market. However, those same rules and regulations are much less valuable today, given (1) the potential for alternative sources of information to solve the lemons problem, and (2) evidence that the appellation system per se might not be effectively serving that purpose as well as it once did, while some of the regulations impose significant social costs. Yield restrictions, in particular, are economically inefficient as a way of enhancing and signaling quality (their ostensible purpose) and as a way of restricting total supply to support market prices and thus producer incomes (a significant motivation). The inherent weaknesses of the policy design are compounded by failures of governance. A less heavy-handed approach to policy would allow more scope for the market mechanism to match supply and demand for this signature product from European agriculture.

New House Premiums, Market Conditions, and the Decision to Purchase a New Versus Existing House

In this paper, we examine how the new house premium has changed over time. We propose that the new home premium can largely be attributed to the “lemons problem” from Akerlof (1970). Recent research suggests that the growth of the Internet has significantly reduced the lemons problem for many products. Our results suggest that the new house premium is about 5.6% without considering time-on-the-market (TOM) and has been declining. This premium ranges from 14.6% (1998) to −2.8% (2010). The average new house premium is 13.3% considering TOM, and ranges from 22.5% (1998) to 5.0% (2010). A trend analysis reveals that new house premiums have fallen 0.8%–0.9% annually, consistent with the Internet, information sharing, and reputation feedback mechanisms reducing the lemons problem associated with asymmetric information.

Smart Buyers

We study transactions in which sellers fear being underpaid because their outside option is better known to the buyer. We rationalize various observed contracts as solutions to such smart buyer problems. Key to these solutions is granting the seller upside participation. In contrast, the lemons problem calls for granting the buyer downside protection. But, in either case, the seller (buyer) receives a convex (concave) claim. Thus, contracts usually associated with the lemons problem, such as debt or cash-equity offers, can be equally well manifestations of the smart buyer problem, although the two information asymmetries have opposite cross-sectional implications. Received December 23, 2014; accepted May 23, 2016 by Editor Uday Rajan.