Lemons Problem Research Articles

Verbal vs. Nonverbal Cues in Static and Dynamic Contexts of Fraud Detection in Crowdsourcing

As an important mode of open innovation, crowdsourcing can effectively integrate external resources, enabling enterprises to obtain stronger competitiveness and more benefits at a faster speed and lower cost. However, this mode has inevitable intellectual property protection challenges, especially on contest-based crowdsourcing platforms. Previous studies mostly focused on the protection of the rights of sponsors while ignoring the rights of workers, rarely paying attention to sponsor fraud, which may reduce the enthusiasm of participants and eventually turn crowdsourcing;' into a lemon market. This study proposes several fraud detection models to address this problem on contest-based crowdsourcing platforms. Furthermore, this paper explores and compares the value of four types of information as deception cues in crowdsourcing contexts via data mining technology and machine learning methods. The results benefit participants in crowdsourcing markets and contribute to fraud detection research and open innovation in the knowledge economy.

Incentivizing Data Quality in Blockchain-Based Systems—The Case of the Digital Cardossier

Inspired by an industry initiative to address the celebrated market for lemons (poor-quality used cars), we investigate how incentives for a permissioned blockchain-based system in the automobile ecosystem can be designed to ensure high-quality data storage and use by different stakeholders. The peer-to-peer distributed ledger platform connects organizations and car owners with disparate interests and hidden intentions. While previous literature has chiefly examined incentives for permissionless platforms, we leverage studies about crowdsensing applications to stimulate research on incentives in permissioned blockchains. This article uses the action design research approach to create an incentive system featuring a rating mechanism influenced by data correction measures. Furthermore, we propose relying on certain institutions capable of assessing data generated within the system. This combined approach of a decentralized data correction and an institutionalized data assessment is distinct from similar incentive systems suggested by literature. By using an agent-based model with strategy evolution, we evaluate the proposed incentive system. Our findings indicate that a rating-based revenue distribution leads to markedly higher data quality in the system. Additionally, the incentive system reveals hidden information of the agents and alleviates agency problems, contributing to an understanding of incentive design in inter-organizational blockchain-based data platforms. Furthermore, we explore incentive design in permissioned blockchains and discuss its latest implications.

Consumers' food control risk attitude for blockchain traceable information seeking: Evidence from fresh fruit buyers in China

The blockchain-based traceability in agri-food marketing has brought a disruptive paradigm shift by removing the inherent information asymmetry problem. Likewise, revealing sufficient product quality and attributes information could break agricultural markets' “Lemon Market” dilemma. This study takes the fresh fruit with blockchain traceability QR label as a case and systematically investigates the influence of consumers' food control risk attitude on information-seeking intentions. We utilized online survey data of 1,058 fresh fruit buyers and simultaneously applied ordinary least square (OLS), ordered logit model (Ologit), and propensity score matching (PSM) approaches to overcome the potential self-selection biases and confounding factors. The results show that risk attitude significantly negatively impacts consumers' information seeking fresh fruits. The stronger consumers' risk preference, the lower the probability of information seeking. Furthermore, we used PSM to overcome potential sample selectivity bias; therefore, PSM reinforces the significance of OLS and Ologit results. The sub-sample estimation results show that young individuals with high school and below education have stronger blockchain information-seeking intentions. The study provides new insights into the role of food control risk attitude and agri-food information traceability and offers several measures for policy and practice to realize a border trajectory in agri-food information disclosure.

A rookie's guide to the academic job market in finance: The labor market for lemons

AbstractTwenty years ago, we circulated our first “Rookie's Guide” to the academic labor market for finance Ph.D. students. Labor market logistics are easier now due to technological change, but the basic informational frictions that made it difficult for rookies to learn the ropes still exist, as do the fundamental market frictions that make bilateral matching between labor demand (hiring schools) and labor supply (the rookies) awkward and challenging. We recapitulate basic advice from previous guides, provide modern updates for the intense interview process, and discuss what to do after you accept an offer and during your first year of employment.

Lemons Market for Corporate Strategy? Political Ideology and Strategy Uniqueness

We theorize that firms’ predilection for strategy uniqueness vs. commonness is a function of executives’ political ideologies and that the strategic fit between strategy uniqueness (vs. commonness) and liberalism (vs. conservatism) further explains the variation of firm value. The literature suggests that strategy uniqueness contributes to superior economic rent, whereas the difficult-to-evaluate characteristic hinders the executives’ selection of a unique strategy. It is called the uniqueness paradox resulting in managerial adverse selection. Although scholars have been attaching importance to unpack drivers of strategy uniqueness, they typically revolve around agency-centered explanations, and overlook managerial inner preferences for circumventing strategy uniqueness. To fill this gap, we explore how CEO political ideology shapes corporate strategy uniqueness. We find that CEO conservatism results in circumventing strategy uniqueness that is an adverse selection of corporate strategy. The negative relationship between CEO conservatism and strategy uniqueness is further moderated by social- and economic-based incentives. The social-based incentive is about how CEOs are evaluated, captured by board attribution tendency, while the economic-based incentive is about how CEOs are motivated, captured by compensation contract design. We also find that the fit between CEO political ideology and firm strategy (i.e., conservatism–commonness fit and liberalism–uniqueness fit) is associated with stronger financial performance. We test these hypotheses on a sample of S&P 1500 CEOs and find support for our predictions.

Endogenous Lemon Markets: Risky Choices and Adverse Selection

Abstract The severity of adverse selection depends, to a great extent, on the underlying distribution of the asset. This distribution is commonly modeled as exogenous; however, in many real-world applications, it is determined endogenously. A natural question in this context is whether one can predict the severity of the adverse selection problem in such environments. In this paper, we study a bilateral trade model in which the distribution of the asset is affected by pre-trade unobservable actions of the seller. Analyzing general trade mechanisms, we show that the seller’s actions are characterized by a risk-seeking disposition. In addition, we show that (location-independent) riskier underlying distributions of the asset induce lower social welfare. That is, “lemon markets” arise endogenously in these environments.

Does risk aversion explain behavior in a lemon market?

AbstractSiegenthaler proposes an ingenious solution to the lemon market adverse selection problem. He incorporates ‘‘cheap talk’’ in which sellers send out costless and nonbinding messages informing potential buyers of the quality of their goods; these messages could be true or false. This segments the market into several submarkets. Potential buyers need to decide which submarket to enter and what price to bid for the goods. Sellers then decide whether to accept the bid or not. He experimentally tests his model and finds that the comparative static results align with his theory, although the data do not exactly fit the model. Indeed, he does not fit the model to the data. His theory assumes risk‐neutral decision‐makers (DMs). Two reasons why the fit is not perfect may be that the DMs are not risk neutral and not perfectly rational. In this note, we report the results of fitting an asymmetric risk averse quantal response equilibrium (QRE) extension of his model to his data, and we find that the extension fits well. We show that the results are consistent with the market evidence and shed light on future research on lemon markets.

Building and sustaining trust in remote work by platform-dependent entrepreneurs on digital labor platforms: Toward an integrative framework

In the platform economy, digital labor platforms (DLPs) enable remote work by intermediating transactions between platform-dependent entrepreneurs (PDEs) and clients. Information asymmetry arises, however, because PDEs engaged in remote work often are more informed about their abilities than clients are, which may lead to the “lemons problem” and cause market failure. Applying transaction cost economics, we develop a framework that incorporates propositions about what conditions allow different forms of trust to emerge among PDEs, DLPs, and clients. We also delineate how building and sustaining trust should help mitigate market failure threats on DLPs, and, in turn, improve outcomes for PDEs, platforms, and clients. Our framework makes important conceptual extensions by highlighting the relevance of information asymmetry, linking trust development within the DLP-facilitated service triad, and underscoring transaction frequency’s importance, which has been largely overlooked in extant literature. It also provides practical implications for remote work involving PDEs, DLPs, and clients.

Bargaining over a Divisible Good in the Market for Lemons

We study bargaining with divisibility and interdependent values. A buyer and a seller trade a divisible good. The seller is privately informed about its quality, which can be high or low. Gains from trade are positive and decreasing in quantity. The buyer makes offers over time. Divisibility introduces a new channel of competition between the buyer’s present and future selves. The buyer’s temptation to split the purchases of the high-quality good is detrimental to him. As bargaining frictions vanish and the good becomes arbitrarily divisible, the high-quality good is traded smoothly over time and the buyer’s payoff shrinks to zero. (JEL C78, D82, L15)

Learning by Owning in a Lemons Market

ABSTRACTWe study market dynamics when an owner learns about the quality of her asset over time. Since this information is private, the owner sells strategically to a less informed buyer following sufficient negative information. In response, market prices feature a “U‐shape” and trading probabilities a “hump‐shape” with respect to the time to sale. As the owner initially acquires greater information, buyers suffer greater adverse selection, and prices fall accordingly. Eventually, the probability of an informed sale shrinks, and prices rebound. We provide evidence consistent with our model in markets for residential real estate, venture capital investments, and construction equipment.

Endogenous lemons markets and information cycles

This article develops a dynamic stochastic general equilibrium model in which information on capital quality is asymmetric and the degree of information asymmetry varies endogenously with the state of the economy, amplifying the shocks. Firms hold capital and borrow to cover operating expenses. Production is subject to idiosyncratic shocks. When a firm’s realized revenue is not enough to cover its debt obligation, the firm must liquidate capital in a market that is subject to the lemons problem. During production, some of the firms' capital depreciates, becoming “lemons”. Firms initially have no information on which units of their capital have depreciated, but they can acquire private information on the quality of their own capital at a cost, which allows them to select low-quality capital to sell during liquidation. Although private information acquisition can be individually beneficial, it generates the lemons problem, decreasing market liquidity and distorting economic allocations. Adverse shocks trigger additional private information acquisition, exacerbating the lemons problem. The model can account for the business cycle patterns in the U.S., and in particular the sizable fluctuations of capital reallocation.

Multi-Party Certification on Blockchain and Its Impact in the Market for Lemons

ABSTRACT Markets in which similar goods of different qualities are sold suffer from information asymmetries and their negative consequences. Dealers have established themselves, and mediate these markets through their use of quality signals. While these signals help to mitigate information asymmetries, these markets still function well below their optimum: a large share of goods sold are overpriced, and most of the benefits are reaped by intermediaries. In this paper we build on prior research that proposes the use of blockchain as an enabler for trusted, decentralized asset documentation. Applying a socio-technical lens, we describe how blockchain-enabled multi-party certification affords dealers the action potential to send signals that are more closely correlated to the unobservable quality of the underlying good (i.e., signals with a higher fit) than the signals they send today. We then both theorize and experimentally explore the market effects of the two types of signals. Using data from a laboratory market experiment with 210 participants, we find empirical evidence that multi-party certification affords dealers the action potential to send signals of significantly higher fit than those sent by intermediaries alone, leading to a reduction in information asymmetries, a more efficient allocation of goods, and an increase in market fairness.

How to stand out in the “lemon market”? application of signaling theory in live streaming commerce

Live streaming commerce innovatively combines e-commerce and live streaming, and it is booming. However, like traditional e-commerce, live streaming commerce is facing challenges from “lemon market”. The article applies signaling theory from a perspective of game theory and finds that high-quality sellers can stand out in the market by releasing two kinds of additional signals, which are signals that increase cost and signals that increase risk, and proposes relevant research hypotheses. Then, the researcher designs an experiment to explore how the additional signals affect the audiences’ purchase intention. The data collected shows that additional signals increasing cost can improve audiences’ purchase intension through improving the product quality and sellers’ credibility perceived by the audience while additional signals increasing risk cannot achieve the same effect. At the end, possible explanations for the unproven hypothesis and further research directions are provided.

Waiting for the Right Offer: Laboratory Evidence on How News Affects Bargaining and the Market for Lemons

Waiting for the Right Offer: Laboratory Evidence on How News Affects Bargaining and the Market for Lemons

Endogenous Offer Arrival in the Market for Lemons

Endogenous Offer Arrival in the Market for Lemons

The micro-task market for lemons: data quality on Amazon's Mechanical Turk

AbstractWhile Amazon's Mechanical Turk (MTurk) has reduced the cost of collecting original data, in 2018, researchers noted the potential existence of a large number of bad actors on the platform. To evaluate data quality on MTurk, we fielded three surveys between 2018 and 2020. While we find no evidence of a “bot epidemic,” significant portions of the data—between 25 and 35 percent—are of dubious quality. While the number of IP addresses that completed the survey multiple times or circumvented location requirements fell almost 50 percent over time, suspicious IP addresses are more prevalent on MTurk than on other platforms. Furthermore, many respondents appear to respond humorously or insincerely, and this behavior increased over 200 percent from 2018 to 2020. Importantly, these low-quality responses attenuate observed treatment effects by magnitudes ranging from approximately 10 to 30 percent.

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.

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

AbstractBulking 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.