Arrow (1963) and Akerlof (1970) are the canonical expositions of market failure that arise from asymmetric information. In both papers, the market outcomes are socially suboptimal, and it is individuals rather than firms that exploit the asymmetry. I have written a note that explores situations in which firms deliberately withhold information from buyers, or provide buyers with misleading information; in these cases, markets overproduce, which can cause consumer surplus to be negative. I am interested in learning if this issue has been covered in the literature. None of the many microeconomics texts (from principles to graduate level) that I have access to even contain the word fraud in their indexes. Jetson Leder-Luis has a research program that is devoted to some aspects of fraud and there is literature on credence goods that deals with some types of fraud but I cannot find any general discussions of the implications for resource allocation. Perhaps economists have ignored fraud because they have assumed that market systems are self-correcting since no fully rational firm would ever sell thalidomide or faulty airbags because such firms fear the wrath of the stock market. But while it would be absurd to argue that all firms engage in fraud it is well documented that some firms have engaged in fraud. (The problem of negligence also seems to be neglected.)
