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Markets with Within-Type Adverse Selection

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  • Anh Nguyen
  • Teck Yong Tan

Abstract

We study bilateral trade with a seller owning multiple units of a good, where each unit is of binary quality. The seller privately knows her "type"—defined by the number of lemons that she own—and which units in her endowments are the lemons ("within-type adverse selection"). We characterize the set of informationally constrained Pareto optimal allocations and show that every such allocation must involve a trade characterized by a threshold λ∗, with types having less (more) than λ∗ units of lemons selling only their lemons (selling their entire endowment). We provide conditions for a distribution shift that give Pareto-improving allocations.

Suggested Citation

  • Anh Nguyen & Teck Yong Tan, 2023. "Markets with Within-Type Adverse Selection," American Economic Journal: Microeconomics, American Economic Association, vol. 15(2), pages 699-726, May.
    • Handle: RePEc:aea:aejmic:v:15:y:2023:i:2:p:699-726
    DOI: 10.1257/mic.20210112
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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