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Gresham's Law in a Lemons Market

Working Paper 376 | Published October 1, 1987

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Author

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S. Rao Aiyagari

Gresham's Law in a Lemons Market

Abstract

We describe a simple environment in which assets of varying qualities may be used for transactions and consumption. The quality of an asset is known to the seller but not the buyer. We show that this feature can generate a negative relationship between the transactions velocities of assets and their rates of return. We also discuss several versions of Gresham's Law which hold in this environment.