engaged in some “irrational behavior,” perhaps there are deeper underlying reasons for this behavior in the first

place.

Mechanisms to Reduce the Risk of Imperfect Information

If you were selling a good like emeralds or used cars where imperfect information is likely to be a problem,

how could you reassure possible buyers? If you were buying a good where imperfect information is a problem,

what would it take to reassure you? Buyers and sellers in the goods market rely on reputation as well as

guarantees, warrantees, and service contracts to assure product quality. The labor market uses occupational

licenses and certifications to assure competency, while the financial capital market uses cosigners and
392 16 • Information, Risk, and Insurance

collateral as insurance against unforeseen, detrimental events.

In the goods market, the seller might offer a money-back guarantee, an agreement that functions as a
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