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Entrepreneurial Solutions to Adverse Selection Problems
From Peter Boettke.
"A new working paper is out by my colleagues at Mercatus -- "How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the 'Lemons Problem.'"
The lead author Adam Thierer has been doing some great work at
Mercatus on entrepreneurship and public policy, and his Mercatus book is
must reading for all who are interested in the vitality of economic
life -- Permissionless Innovation.
In the early 2000s, I actually work with one of our PhD students --
Mark Steckbeck -- on the topic of how reputational feedback mechanisms
were emerging in e-commerce to address adverse selection problems. Our
paper "Turning Lemons into Lemonade"
was published in 2004 and focused on the reputational feedbacks on
E-Bay by way of a case study of the sale prices of high end photography
equipment.
But what is most striking about all of this when you study it closely
is two things -- even Akerloff's original paper, he actually implies
the solution to the "lemons problem" at the end of the paper, but the
popular understanding of the literature is that this was a market
failure that required a government solution, and in 1940s Hayek had
already pointed out the critical importance of reputation in dynamic
market competition in his essay "The Meaning of Competition". As Hayek
wrote:
In actual life the fact that our inadequate knowledge of the
available commodities or services is made up for by our experience with
the persons or firms supplying them — that competition is in a large
measure competition for reputation or good will — is one of the most
important facts which enables us to solve our daily problems."
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