Asymmetry in information, dishonesty and the effect on a market.

Dishonesty, personal interest, advertising misrepresentations and so on have assumed an important place in the organizations. In any company, people are motivated by factors such as sales quotas, career advancement, profits and success. Dishonest tactics can be implement by companies in their external dealings – those with customers, suppliers, regulators and stockholders – for example, in order to increase their short-term profits.

But how much are the costs of dishonesty? To answer to this question it is necessary to use the Lemons model, which explains the consequence of information asymmetry when the seller knows more about the good than the buyer.

It's just a lie here and there. However, in business asymmetrical information can over time destabilize a market and potentially shut it down altogether.

It has been seen that the good cars may be driven out of the market by the lemons. But in a more continuous case with different grades of goods, even worse pathologies can exist. For it is quite possible to have the bad driving out the not-so-bad driving out the medium driving out the not-so-good driving out the good in such a sequence of events that no market exists at all. 

Enter Gresham's law

Gresham's law has made a modified reappearance. For most cars traded will be the "lemons," and good cars may not be traded at all. The "bad" cars tend to drive out the good (in much the same way that bad money drives out the good). 

The Lemons model explains the effect when honest and dishonest dealings clash.

The Lemons model can be used to make some comments on the costs of dishonesty. Consider a market in which goods are sold honestly or dishonestly; quality may be represented, or it may be misrepresented. The purchaser's problem, of course, is to identify quality. The presence of people in the market who are willing to offer inferior goods tends to drive the market out of existence -as in the case of our automobile "lemons." It is this possibility that represents the major costs of dishonesty - for dishonest dealings tend to drive honest dealings out of the market. There may be potential buyers of good quality products and there may be po- tential sellers of such products in the appropriate price range; however, the presence of people who wish to pawn bad wares as good wares tends to drive out the legitimate business. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence. 

More here:

The Market for "Lemons": Quality Uncertainty and the Market Mechanism
George A. Akerlof
The Quarterly Journal of Economics, Vol. 84, No. 3. (Aug., 1970), pp. 488-500.

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