# Quality and uncertainty



- [The Market for "Lemons": Quality Uncertainty and the Market Mechanism](https://knowen-production.s3.amazonaws.com/uploads/attachment/file/2083/Akerlof%2Bmarkets%2Bfor%2Blemons.pdf) by Akerlof

a famous and accessible paper. A stability of the market depends on the information asymmetry, which is what sellers know that buyers don't know. It is important that good and bad cars are traded at the same price, while sellers do know how good/bad their cars are.

The problem is clearly described and reduced to a model, although [the applicability and the practical solutions can be different](https://mises.org/library/lemons-and-nobel-prize) and depend on further details. Both papers, "Lemons" and "On the impossibility ..." rely on utility functions, and there can be differences in time-dynamics (Kelly-Thorp approach) versus classic utility theory. The problem is similar to [Gresham's law how "bad money drives out good money".](https://en.wikipedia.org/wiki/Gresham%27s_law)

- [On the Impossibility of Informationally Efficient Markets](https://knowen-production.s3.amazonaws.com/uploads/attachment/file/2084/grossman_stiglitz__1980_%2Bon%2Bthe%2Bimpossibility%2Bof%2Binformationally%2Beficient%2Bmarkets.pdf) by Grossman and Stiglitz

Information is costly. The markets is the information mechanism. [Price is a noisy signal](http://www.bu.edu/econ/files/2011/01/GSslides.pdf) due to informationally inefficient markets.

- see also [Leverage and Uncertainty](https://knowen.org/nodes/22789?path=1-616-22789). In the context of "Lemons", uncertainty means the uncertainty of QUALITY on the offer side. In the context of markets, uncertainty means unexpected events of "unknown unknowns" type. In both cases, uncertainty mean the lack of the information, which nevertheless drives and transforms the markets quite explicitly (and now in many cases).

## Reputation and Attention

Reputation can be used to reduce uncertainty by using a "clustered" wisdom of crowds. Reputation is always used to direct attention. Can market mechanisms and design create efficient attention markets? Should reputation be viewed as hierarchical tree, where different layers represent qualitatively different depth of expertise (levels - school, university, professional, professor, genius)? "Quality" (in the above) is similar to "reputation".

Credit markets, private and public debt and derivatives/CDS markets, are hierarchical in the valuation and understanding the risks. These markets describe the allocation of the capital. Similarly, the allocation of attention is based on the reputation. The attention (as capital, debt, and equity) is required to the development and growth of an individual (just like for a firm).

# Parents

* Reputation systems - General
* Practical Economics

# Attachments

* [](https://knowen-production.s3.amazonaws.com/uploads/attachment/file/2083/Akerlof%2Bmarkets%2Bfor%2Blemons.pdf)
* [](https://knowen-production.s3.amazonaws.com/uploads/attachment/file/2084/grossman_stiglitz__1980_%2Bon%2Bthe%2Bimpossibility%2Bof%2Binformationally%2Beficient%2Bmarkets.pdf)