# kaal:claim:3949098-020

**Claim.** In traditional underwriting, investors who cannot distinguish underwriters by reputation create free riding: once free riding occurs, underwriters stop investing in screening and try to free ride on others, producing a lemons problem.

**Type.** failure  **Support.** argued

**Holds when.**

- traditional underwriting markets
- investors cannot distinguish underwriters based on reputation

**Source quote.**

> As a result, free-riding on other's reputation may occur. Once free riding occurs, traditional underwriters will likely stop investing in their screening and instead attempt to free ride on others. This creates what is known as a lemons problem in the law and economics literature.

**From.** Wulf A. Kaal, *Reputation as Capital – How DAOs Upgrade Finance* (2021), II. Basic Concept, 4. Decentralized Underwriting, page 13

**Cite as.** Wulf A. Kaal, Reputation as Capital – How DAOs Upgrade Finance (2021). SSRN: https://ssrn.com/abstract=3949098

**Verify.** sha256 of source PDF `04297905564a6092b2db7640561f58fd374d3114c79527357bad09d11b909819` at https://raw.githubusercontent.com/wulfkaal/Academic-Papers/main/papers/pdf/Kaal%20-%202021%20-%20Reputation%20as%20Capital%20%E2%80%93%20How%20DAOs%20Upgrade%20Finance.pdf

**Failure mode.** Underwriter Screening Free Ride And Lemons Problem  (family: information-asymmetry)

**Topics.** defi

**Keywords.** underwriting, free-riding, lemons-problem, screening, gatekeepers

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