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Efficient Sorting in a Dynamic Adverse-Selection Model

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  • Igal Hendel
  • Alessandro Lizzeri
  • Marciano Siniscalchi

Abstract

We discuss a class of markets for durable goods where efficiency (or approximate efficiency) is obtained despite the presence of information asymmetries. In the model, the number of times a good has changed hands (the vintage of the good) is an accurate signal of its quality, each consumer self-selects into obtaining the vintage that the social planner would have assigned to her, and consumers' equilibrium trading behaviour in secondary markets is not subject to adverse selection. We show that producers have the incentive to choose contracts that lead to the efficient allocation, and to supply the efficient output. We also provide a contrast between leasing contracts, resale contracts, and different kinds of rental contracts. Resale contracts do not lead to the efficient allocation. A specific kind of rental contract provides the appropriate incentives to consumers. Copyright 2005, Wiley-Blackwell.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 72 (2005)
Issue (Month): 2 ()
Pages: 467-497

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Handle: RePEc:oup:restud:v:72:y:2005:i:2:p:467-497

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  1. Maarten Janssen & Santanu Roy, 2004. "On durable goods markets with entry and adverse selection," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 37(3), pages 552-589, August.
  2. Maarten C. W. Janssen & Santanu Roy, 2002. "Dynamic Trading in a Durable Good Market with Asymmetric Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 257-282, February.
  3. Igal Hendel & Alessandro Lizzeri, 1997. "Adverse Selection in Durable Goods Markets," NBER Working Papers 6194, National Bureau of Economic Research, Inc.
  4. I. Hendel & A. Lizzeri & M. Siniscalchi, 2002. "Efficient Sorting in a Dynamic Adverse-Selection Model," Princeton Economic Theory Working Papers, David K. Levine 9879581e6de5e61fcfb0cd82b, David K. Levine.
  5. Greenwald, Bruce C, 1986. "Adverse Selection in the Labour Market," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 53(3), pages 325-47, July.
  6. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(2), pages 314-32, April.
  7. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, Elsevier, vol. 18(2), pages 301-317, August.
  8. Faruk Gul & Hugo Sonnenschein & Robert Wilson, 2010. "Foundations of Dynamic Monopoly and the Coase Conjecture," Levine's Working Paper Archive 232, David K. Levine.
  9. Christopher L. House & John V. Leahy, 2000. "An sS Model with Adverse Selection," NBER Working Papers 8030, National Bureau of Economic Research, Inc.
  10. Igal Hendel & Alessandro Lizzeri, 1998. "The Role of Leasing under Adverse Selection," NBER Working Papers 6577, National Bureau of Economic Research, Inc.
  11. Dmitriy Stolyarov, 2002. "Turnover of Used Durables in a Stationary Equilibrium: Are Older Goods Traded More?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(6), pages 1390-1413, December.
  12. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(3), pages 488-500, August.
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Cited by:
  1. Battaglini, Marco, 2007. "Optimality and renegotiation in dynamic contracting," Games and Economic Behavior, Elsevier, Elsevier, vol. 60(2), pages 213-246, August.
  2. Kawai, Keiichi, 2014. "Dynamic market for lemons with endogenous quality choice by the seller," Games and Economic Behavior, Elsevier, Elsevier, vol. 84(C), pages 152-162.
  3. J. Atsu Amegashie, 2013. "Consumers' Complaints, the Nature of Corruption, and Social Welfare," CESifo Working Paper Series, CESifo Group Munich 4295, CESifo Group Munich.
  4. Moore, John, 2013. "Contagious Illiquidity I: Contagion through Time," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2013-73, Scottish Institute for Research in Economics (SIRE).
  5. Alessandro Lizzeri, 2003. "Efficient Sorting in a Dynamic Adverse Selection Model," Theory workshop papers, UCLA Department of Economics 505798000000000098, UCLA Department of Economics.
  6. Engers, Maxim & Hartmann, Monica & Stern, Steven, 2009. "Are lemons really hot potatoes?," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 27(2), pages 250-263, March.
  7. Marco Battaglini, 2003. "Long-Term Contracting with Markovian Consumers," Theory workshop papers, UCLA Department of Economics 505798000000000048, UCLA Department of Economics.
  8. Pablo Kurlat, 2013. "Lemons Markets and the Transmission of Aggregate Shocks," American Economic Review, American Economic Association, American Economic Association, vol. 103(4), pages 1463-89, June.
  9. Ennio Bilancini & Leonardo Boncinelli, 2014. "Dynamic Adverse Selection and the Supply Size," Center for Economic Research (RECent), University of Modena and Reggio E., Dept. of Economics 099, University of Modena and Reggio E., Dept. of Economics.

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