The Market for Lemons

The Market for Lemons: Quality Uncertainty and the Market Mechanism is a paper by George Akerlof written in 1970 that established the fundamentals of asymmetrical information theory. Akerlof, a professor at the University of California, Berkeley, won the Nobel Prize of Economics in 2001 for his research.

The paper describes the secondhand market for used cars. Some cars are in good working order — these are referred to as jewels; Some have hidden defects — these are called lemons. Yet because buyers don't know which cars are the lemons—in this asymmetric market—the market price of even a good car decreases. Thus, sellers of good cars are less economically inclined to sell their cars, and a rational market will only be filled with bad cars.

The term lemon, meaning a defective (typically used) car, entered the language as a result of this paper.