Review of Behavioral Economics > Vol 3 > Issue 2

Lemons & Loons

Timothy Perri, Department of Economics, Appalachian State University, USA,
Suggested Citation
Timothy Perri (2016), "Lemons & Loons", Review of Behavioral Economics: Vol. 3: No. 2, pp 173-188.

Published: 14 Jul 2016
© 2016 T. Perri

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In this article:
1. Introduction
2. Lemons Market Setup
3. Akerlof’s Example of a Complete Lemons Market
4. A Less than Complete Lemons Market
5. Job Market Signaling
6. Simultaneous Screening and Pooling
7. Summary
A. Appendix


In Akerlof (2012, 2013), Akerlof and Tong (2013), and Akerlof and Shiller (2015), it is argued that individuals often do not behave according to rational expectations. They show how buyers in a complete lemons market are worse off if they behave irrationally – like loons. I examine different situations with asymmetric information (including when workers may signal or be screened to reveal their ability) to determine the effects on welfare for loons and for society. Sometimes there are opposite effects for welfare, for society and loons. It is also possible for society to gain when loons, on average, gain from loony behavior.