Asymmetric Solutions to Asymmetric Information Problems

20 Pages Posted: 13 Aug 2021

See all articles by Giuseppe Dari‐Mattiacci

Giuseppe Dari‐Mattiacci

University of Amsterdam; Tinbergen Institute; European Corporate Governance Institute (ECGI)

Sander Onderstal

University of Amsterdam; Tinbergen Institute

Francesco Parisi

University of Minnesota - Law School; University of Bologna

Multiple version iconThere are 2 versions of this paper

Date Written: January 22, 2021


This paper studies markets plagued with asymmetric information on the quality of traded goods. In Akerlof’s setting, sellers are better in- formed than buyers. In contrast, we examine cases where buyers are better informed than sellers. This creates an inverse adverse selection problem: the market tends to disappear from the bottom rather than from the top. In contrast to the traditional model, it is the high-value goods (gems) that are traded on the market, rather than the low-value goods (lemons). We refer to this asymmetric information scenario as the “market for gems.” We investigate the consequences of this undisclosed knowledge of hidden qualities — which we refer to as inverse adverse selection — and the reasons why legal theorists have given this form of asymmetric information substantially less consideration. Conventional legal and contractual solutions to the lemons problem are often ineffective in the gems case: the uninformed buyer in a traditional market for lemons experiences the quality of the good he purchased; in a market for gems, instead, the uninformed seller may never know the quality of the good that he sold. We study three alternative solutions to the gems problem — auctions, suppression of information, and inverse warranties — and identify the condition under which each of them is feasible. We then show how the theory sheds light on real-life gems problems arising in the multi-million dollar transactions involving soccer players, artworks, M&As, Hollywood movies, and diamonds.

Keywords: lemons, gems, adverse selection, asymmetric information, auction, warranty, block-booking

JEL Classification: D44, D82, D86, K12

Suggested Citation

Dari-Mattiacci, Giuseppe and Onderstal, Sander and Parisi, Francesco, Asymmetric Solutions to Asymmetric Information Problems (January 22, 2021). Available at SSRN: or

Giuseppe Dari-Mattiacci

University of Amsterdam ( email )

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Amsterdam, Noord-Holland 1001 ND

Tinbergen Institute ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Sander Onderstal

University of Amsterdam ( email )

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Tinbergen Institute ( email )

Burg. Oudlaan 50
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Francesco Parisi (Contact Author)

University of Minnesota - Law School ( email )

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Minneapolis, MN 55455
United States

University of Bologna ( email )

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40126 Bologna, fc 47100

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