purchasing a “lemon.”

Markets have many ways to deal with imperfect information. In goods markets, buyers facing imperfect

information about products may depend upon money-back guarantees, warranties, service contracts, and

reputation. In labor markets, employers facing imperfect information about potential employees may turn to

resumes, recommendations, occupational licenses for certain jobs, and employment for trial periods. In

capital markets, lenders facing imperfect information about borrowers may require detailed loan applications

and credit checks, cosigners, and collateral.
404 16 • Self-Check Questions

16.2 Insurance and Imperfect Information

Insurance is a way of sharing risk. People in a group pay premiums for insurance against some unpleasant

event, and those in the group who actually experience the unpleasant event then receive some compensation.

The fundamental law of insurance is that what the average person pays in over time cannot be less than what
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