Comment by eru
6 months ago
Let me give you an example: reputation can solve the 'market for lemons'.
If you build a reputation for honest dealing and high quality, then people can trust that you don't sell them lemons (ie bad used cars in the original example). This reputation is valuable, so (most) companies will try to protect it.
And that's exactly what's happening with some used car dealers.
You know, the lemon market also applies to new cars, right? And it still happens with name brands. Go read the paper, it accounts for those things.
I mean it got a Nobel prize. You really think they didn't think things through?
The paper explicitly has to exclude reputation as a mechanism.
They did think this through, but that doesn't mean reputation doesn't work in the real world.
I think you should read the paper. Did they exclude reputation or did reputation not matter to the equation? Are you going to criticize the fact that they "excluded" the color of a person's eyes?
https://www.sfu.ca/~wainwrig/Econ400/akerlof.pdf