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QUESTION
Title: information asymmetry concepts
Order Details:
No sources required- need 1 page essay that explains two concepts of Information asymmetry concepts:\r\n1) Lemon Principle\r\n2) Full disclosure Principle\r\n1/2 page or 250 words for each concept.\r\nAlso want plagiarism check and report
| Subject | Essay Writing | Pages | 3 | Style | APA |
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Answer
Information Asymmetry Concepts
Lemon Principle
This is a principle developed by George Akerlof in 1970 in his article “The Market for “Lemons”: Quality Uncertainty and the Market Mechanism in the Quarterly Journal of Economics” that won him a Nobel Prize in 2001. George describes the market of used cars where sellers have more information than buyers and how it leads to market failure. Sellers and buyers have differing knowledge about the true value of a product in the market in that sellers are more knowledgeable than buyers. In his article, George Akerlof compared the prices between new cars and used ones. In selling a new car, neither the seller nor the buyer knows the true value of the product thus a balance of information possessed between both parties.
However, in selling a used car, only the seller knows the true value of the car and in most cases, sellers may sell it off as having a greater value even though it is not. George continues to explain that in the market, as opposed to used cars, sellers with good cars will expect to sell them for a higher price, say $10,000, while sellers with “lemon” cars will accept a lower price of $5,000. Buyers will access the market and may gather the fifty percent probability that a used car may either be of good or bad quality. In their assessment, buyers set expected value of cars at the average of $5,000 instead the sellers with “lemon” cars. Since sellers with good quality cars will not accept a lower price for their cars, they will eventually leave the market without making any sales. This leads to market failure since markets are mostly thrived by poor but quality goods.
Full Disclosure Principle
This is an accounting principle that states that one should disclose all relevant information in their financial statements, giving an institution or a party in business the means to be discrete thus boosting their credibility. Buyers who present their private information to sellers are considered credible while, on the other hand, those who seem private are considered untrustworthy. In Lemon Principle, products of low value diminish products of high value in the market, eventually leading to market failure. However, this principle is the opposite of Lemon Principle where high value products diminish low value products. This type of market is healthy since buyers get good products and sellers benefit from the full value of their products.
Moreover, in Full Disclosure Principle sellers with higher value products are compelled to reveal to their buyers all important information about their products so that they are not misled. This may require disclosing secrets with the aim of rising above average from other sellers in the market. However, disclosure may come with a price where it may cripple a business institution by destroying their reputation and impairing their financial statements. Such information to be disclosed may include the nature of the business, full financial statements, accounting policies, accounting standards in preparing financial statements, events happening in the business and changes in accounting estimates. Full Disclosure Principle can be used as a tool in reversing the Lemon problem and saving a market.
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