Experimental Studies of Markets with Buyers Ignorant of Quality Before Purchase: When do "Lemons" Drive out High Quality Products? A Report to the Federal Trade Commission

Experiments indicated that if sellers could not develop reputations for poor quality, then the market would consist entirely of poor quality products. The need to attract re-purchase is not sufficient incentive to have the seller build a reputation for supplying good quality, while the imposition of a requirement for truthful advertising or labelling is sufficient

Product Quality Signaling in Experimental Markets

In a series of eleven markets, sellers possessed products that were exogenously designated as either grade "regular" or grade "super." Supers were valued more by buyers but grade could not be observed by buyers prior to purchase. Sellers could add costly units of quality to their products that were observable and valued by buyers. The data are analyzed with perfect information models, signaling equilibrium models, and pooling models. A variety of behaviors are observed across the eleven markets. Signaling is observed in most markets with some markets approaching the most efficient signaling equilibrium. Pooling or partial pooling occurs in a few markets. The performance seems to be sensitive to the relative cost of signaling and the market institutional setting

Product Quality, Consumer Information and "Lemons" in Experimental Markets

This paper reports on the behavior of experimental markets wherein buyers were ignorant (unless truthfully informed by sellers) of the quality of the product purchased. True quality of the product was learned only after the sale. Sellers chose quality or "grade" and higher quality was more costly to produce. Our experimental markets were characterised by asymmetric information possessed by buyers and sellers who traded a pure "experience" good whose quality was endogenously determined

Product Quality, Informational Efficiency, and Regulations in Experimental Markets

This study reports on the behavior of experimental markets in which product quality is endogenously determined and cannot be observed by buyers prior to purchase. Several theories suggest that with asymmetric information about product quality between buyers and sellers and the absence of properly defined rules of liability, markets cannot be expected to generate products of "optimal grade." According to such theories markets will be informationally inefficient. Information that exists will not be properly used because the wrong people have it. As a result, products that can be cheaply produced but are of undesirable quality ("lemons") will drive good grade products from the market because buyers will be improperly informed at the time of purchase. However, very little noncontroversial evidence exists regarding the proposition. Several modes of behavior and institutions can theoretically intervene to mitigate the problems. In addition, theories are hard to test because measurements of preferences, cost, knowledge, and so forth, of sufficient precision to determine whether a market has "failed" are difficult in naturally occurring environments. The markets we created and studied have fewer such complications

Set-Rationalizable Choice and Self-Stability

A common assumption in modern microeconomic theory is that choice should be rationalizable via a binary preference relation, which \citeauthor{Sen71a} showed to be equivalent to two consistency conditions, namely $\alpha$ (contraction) and $\gamma$ (expansion). Within the context of \emph{social} choice, however, rationalizability and similar notions of consistency have proved to be highly problematic, as witnessed by a range of impossibility results, among which Arrow's is the most prominent. Since choice functions select \emph{sets} of alternatives rather than single alternatives, we propose to rationalize choice functions by preference relations over sets (set-rationalizability). We also introduce two consistency conditions, $\hat\alpha$ and $\hat\gamma$, which are defined in analogy to $\alpha$ and $\gamma$, and find that a choice function is set-rationalizable if and only if it satisfies $\hat\alpha$. Moreover, a choice function satisfies $\hat\alpha$ and $\hat\gamma$ if and only if it is \emph{self-stable}, a new concept based on earlier work by \citeauthor{Dutt88a}. The class of self-stable social choice functions contains a number of appealing Condorcet extensions such as the minimal covering set and the essential set.Comment: 20 pages, 2 figure, changed conten

The Banks set and the Uncovered Set in budget allocation problems

We examine how a society chooses to divide a given budget among various regions, projects or individuals. In particular, we characterize the Banks set and the Uncovered Set in such problems. We show that the two sets can be proper subsets of the set of all alternatives, and at times are very pointed in their predictions. This contrasts with well-known "chaos theorems," which suggest that majority voting does not lead to any meaningful predictions when the policy space is multidimensional

Discovering manipulated social choices: The coincidence of cycles and manipulated outcomes

Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/45514/1/11127_2004_Article_BF00128879.pd