Decentralized Trade Mitigates the Lemons Problem
نویسنده
چکیده
In markets with adverse selection, only low-quality units trade in the competitive equilibrium when the average quality of the good held by sellers is low. We show that under decentralized trade, however, both highand low-quality units trade, although with delay. Moreover, when frictions are small, the surplus realized is greater than the (static) competitive surplus. Thus, decentralized trade mitigates the lemons problem. Remarkably, payoffs are competitive as frictions vanish, even though both highand low-quality units continue to trade, and there is trade at several prices.
منابع مشابه
Working Paper No. 11-36 Trading Dynamics in Decentralized Markets with Adverse Selection
We study a dynamic, decentralized lemons market with one–time entry and characterize its set of non–stationary equilibria. This framework offers a theory of how a market suffering from adverse selection recovers over time endogenously; given an initial fraction of lemons, the model provides sharp predictions about how prices and the composition of assets evolve over time. Comparing economies in...
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