Signalling: The Unspoken Language We Use Every Day
Not having enough information is a problem.
George Akerloff was the first to detail this. In his Nobel-winning paper, The Market for Lemons, he observed that markets with asymmetric information would eventually collapse.
Because only sellers would know the condition of the goods they sold, they could always mask defective products — lemons — as quality products and charge buyers the higher price for them. To protect themselves, buyers had to price in the above possibility they would end up with a lemon. This meant assuming that they were likely being offered an average product, and should pay no more than what it could command.
You can imagine what an inefficient system this was. As buyers offered lower prices, sellers started to offer even lower quality products. With each feedback loop, the market for goods deteriorated. Nobody got anything of value from transacting in that good. The market is left to collapse.
The startling thing is that the bad often drives out the good.
Honest sellers who would never mask a lemon as a quality product are forced to leave the market because they won’t get fair value for what they offer. It’s the rogues and charlatans who stay because they know they can profit off this information asymmetry…
