In a much-cited analysis of the used-car market, the economist George Akerlof described a process he called adverse selection. Sellers of used cars know whether their vehicle is sound or defective—what the trade calls a "lemon"—but buyers, unable to distinguish the two before purchase, can rely only on the average quality of cars on offer. Because buyers will pay no more than a price reflecting that average, the owners of the best cars, whose vehicles are worth more than the average price, find selling unattractive and withdraw from the market. Their departure lowers the average quality of the remaining cars, which in turn drives the price buyers are willing to pay still lower; this further depresses the quality threshold at which an owner will sell. In principle, the cycle can continue until only the worst vehicles trade, or until no transactions occur at all.

Akerlof's point was not that used-car markets actually collapse—plainly they do not—but that they would, absent institutions that counteract the information gap. Warranties, dealer reputations, third-party inspections, and brand-name certification all function, on this view, less as marketing conveniences than as devices that let a seller of a genuinely good car credibly signal its quality and thereby command a price above the pooled average. Their prevalence, Akerlof suggested, is itself indirect evidence of how severe the underlying problem would otherwise be. Critics have noted that the model assumes buyers cannot improve their information at reasonable cost; where inspection is cheap and reliable, the unraveling Akerlof describes is correspondingly muted.