Lemons Problem

Lemons problem

Named after 2001 Nobel Laureate George Akerlof's 1970 paper "The Market for Lemons". His original example had to do with used cars. Why does the seller want to get rid of the car? It might be a lemon. The buyer and seller have asymmetric information. Hence, the buyer will demand a deep discount on the car because of the possibility it is a lemon.

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Lemons Problem

The problem of asymmetric information in investing. In most investments, the buyer takes a risk that the seller is trying to sell because he/she knows that the investment is a lemon, that is, a nearly guaranteed loss. To compensate for the lemons problem, many buyers offer prices lower than they otherwise would in a perfectly symmetrical market.