When sellers know more about quality than buyers, good goods are driven out and the market can unravel.
A used car worth $4,000 to its owner cannot be distinguished from one worth $2,000, so buyers offer the average, good sellers withdraw, and the average falls again. Akerlof's 1970 paper was rejected by three journals before publication.
In practice
- A freelance market fills with cheap unvetted work until buyers assume anything cheap is bad, and the competent freelancers leave for agencies.
- A neighbourhood's landlords cannot show their flats are damp-free, so tenants discount every listing and the good landlords stop advertising.