‘Lemons’ problem in a democracy

George Akerlof, a Nobel price winner in economics in 2001, proposed the lemons problem in an article in 1970. A competitive market fails when buyers and sellers have different (asymmetric) information about the quality of the product, and it is costly to obtain the accurate information. In the absence of accurate information buyers decide to base their offer price on the basis of average quality. Hence the low quality (lemon) product will undercut the high quality product, thus driving out the high quality product from the market. This insight is the basis of lemon laws, full disclosure regulations, warrantees, etc.

I argue that we face the same problem in the political market place, where voters are buyers of political candidates’ services and political candidates are sellers of their services. The price a voter pays is the political contribution to the political candidate of his or her choice. Both parties are guided by self-interest. Candidates would like to get elected and reelected, and voters want someone who promotes their interests. I would restrict my argument to politicians, but the argument could be extended to legislations, laws and policies.

I define a political candidate as lemon (low quality) if the political candidate does not promote benefits to a large majority of citizens. If the information provided by promoters of political candidates to voters is inaccurate and asymmetrical, and the accurate information is costly to obtain, we may end up electing lemon candidates. An example of the information asymmetry is swift boat episode used against John Kerry in the presidential election in 2004.

The question arises why would voters vote for lemon candidates? In the absence of accurate information about high quality and low quality candidates, median voter faces an equal chance that a candidate is of low and high quality. Now the question is what does increase the chance of lemons getting elected? The answer lies in the politics of large vs. small group of voters.

For a large group of voters who generally have diversity of goals and interests, as opposed to a narrowly focused small group of voters, the expected benefits of voting for a candidate are thinly spread out among the voters; costs to individuals to obtain correct information could be relatively very high. But for a small group of voters, organized around narrowly focused issues, benefits are greater to individual voters in the group relative to their costs. Such groups therefore are willing to spend greater amount on campaigns of those candidates who support their cause. In addition, lemon candidates have a higher probability of getting elected if they side with aspirations and preferences of a small group. On the other hand, voters in a large group would tend to contribute small amounts of financial support to candidates who support their multiple objectives. Hence, benefit cost calculations increase the probability of lemons getting elected.

The gun lobby and the Tea Party are examples of small group politics. They are primarily narrowly focused organizations. They often succeed in getting lemon candidates elected. The danger of unmitigated spread of asymmetrical information is that lemons will dominate high quality candidates in the political market place. The explosion of information without accountability of its accuracy does not help efficient functioning of the political market place.

The practical solution to this problem is that all voters (not just some narrowly focused groups) must become more involved in the political process and acquire more accurate information from reliable sources before supporting candidates. The media must also become more involved in providing accurate and detailed information on candidates and their voting record on a continuing basis. Jacob S. Hacker and Paul Pierson in their book Winner-Take–All Politics, while commenting on claims made in political campaigns, state, “ Even hard news consists of mostly sound bites. Efforts to analyze the veracity or relevance of these claims, or to place them in context are either left to the end or left out altogether.” It is hoped that voters in our democracy do not confirm Winston Churchill’s statement when he said, “ The best argument against democracy is five minute conversation with the average voter.”

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2 Responses to ‘Lemons’ problem in a democracy

  1. Bob Becker says:

    A corollary observation might be that when it becomes more difficult, without a large investment of time, to separate out good information from bad, people become less interested in doing it, and so do it less. As more lemon candidates are thus chosen, similarly, more and more people will give up on the process entirely and not take part at all. The “what’s the use?” factor comes into play. I’ve noticed this growing particularly in young people

    When I was a teen [the 1950s], for a young man, there were three great rites of passage where I lived [NY]. (a) Age 16, you got your driver’s license (b) at age 18, you registered for the draft (c) at age 21, you got to cast your first vote. All were a big deal in the Brooklyn of my youth, major rites of passage with (esp. b and c) an air of “my son, today you are a man” about them. I would never have occurred to me not to vote when I reached 21.

    But a large number of the students I used to teach in college recently [who can now vote at 18] have never voted, and don’t expect to anytime soon. When asked why, “what’s the use?” often is offered as a reason.

    An outcome of the lemon law applied to politics? I suspect so.

  2. Ateh Thomson Pepeah says:

    It seems the case but there is more to i think.i veiwed the subject in the dimention of factors that would likely influence the demand of these leaders in the market of political leaders and in concideration to the African context. in this continent, most elections are a one round type not giving any chances for electorates to play a more informed choice in the next came. many lemons even defect the market the more by reducing the cost to the votter of votting them. they accumulate money purposely for this period and gifts too which they share. This causes arationality buyer[votter] to go for the good with lesser oportunity cost than for a good with greater oportunity cost. in Africa, while others vote lemons and return home with a dollar or two, very few prefere quality leadership and no benefits, of a chunk of meat that night or even a cent. this sacrifies[waving these gifts] to an average African is just too costly[very difficult] but the erro in it sterms from the fact that these votters stay commited to their pledges, and just like Noudus williams assumed, they are very forgetful and only remember the emidiate present. As a principle, the higher the prices, the greater the quantity demanded and since power is in the hands of the lemons, finances always never lack for campaign purposes. This thus explains the continuous demand of lemons. Today, it is now a matter of already knowing the results of the future presidential election or any as the case ay be. Why waste time, stand on those long lines at the poles just to get the same results that has never changed since you were born? I am currently still doing a study on this topic.

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