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Trading Dynamics with Private Buyer Signals in the Market for Lemons

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  • Ayça Kaya
  • Kyungmin Kim

Abstract

We present a dynamic model of trading under adverse selection in which a seller sequentially meets buyers, each of whom receives a noisy signal about the quality of the seller’s asset and offers a price. We fully characterize the equilibrium trading dynamics and show that buyers’ beliefs about the quality of the asset can either increase or decrease over time, depending on the initial level. This result demonstrates how the introduction of private buyer signals enriches the set of trading patterns that can be accommodated within the framework of dynamic adverse selection, thereby broadening its applicability. We also examine the economic effects of search frictions and the informativeness of buyers’ signals in our model and discuss the robustness of our main insights in multiple directions.

Suggested Citation

  • Ayça Kaya & Kyungmin Kim, 2018. "Trading Dynamics with Private Buyer Signals in the Market for Lemons," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(4), pages 2318-2352.
    • Handle: RePEc:oup:restud:v:85:y:2018:i:4:p:2318-2352.
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    File URL: http://hdl.handle.net/10.1093/restud/rdy007
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    Cited by:

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    2. Heinsalu, Sander, 2020. "Investing to access an adverse selection market," International Journal of Industrial Organization, Elsevier, vol. 72(C).
    3. Dilmé, Francesc, 2019. "Dynamic quality signaling with hidden actions," Games and Economic Behavior, Elsevier, vol. 113(C), pages 116-136.
    4. Hwang, Ilwoo, 2018. "Dynamic trading with developing adverse selection," Journal of Economic Theory, Elsevier, vol. 176(C), pages 761-802.
    5. Kaya, Ayça & Roy, Santanu, 2022. "Market screening with limited records," Games and Economic Behavior, Elsevier, vol. 132(C), pages 106-132.
    6. Peter Wagner, 2023. "Seller experimentation and trade," Review of Economic Design, Springer;Society for Economic Design, vol. 27(2), pages 337-357, June.
    7. Sarah Auster & Piero Gottardi & Ronald Wolthoff, 2022. "Simultaneous Search and Adverse Selection," Working Papers tecipa-734, University of Toronto, Department of Economics.
    8. Soeren Johansen & Anders Rygh Swensen, 2021. "Adjustment coefficients and exact rational expectations in cointegrated vector autoregressive models," Discussion Papers 21-07, University of Copenhagen. Department of Economics.
    9. Choi, Michael, 2018. "Imperfect information transmission and adverse selection in asset markets," Journal of Economic Theory, Elsevier, vol. 176(C), pages 619-649.
    10. Starkov, Egor, 2023. "Only time will tell: Credible dynamic signaling," Journal of Mathematical Economics, Elsevier, vol. 109(C).
    11. Barsanetti, Bruno & Camargo, Braz, 2022. "Signaling in dynamic markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 206(C).
    12. Dino Gerardi & Lucas Maestri & Ignacio Monzón, 2022. "Bargaining over a Divisible Good in the Market for Lemons," American Economic Review, American Economic Association, vol. 112(5), pages 1591-1620, May.
    13. Ben Casner, 2021. "Learning while shopping: an experimental investigation into the effect of learning on consumer search," Experimental Economics, Springer;Economic Science Association, vol. 24(1), pages 238-273, March.
    14. Daniel Broxterman & Tingyu Zhou, 2023. "Information Frictions in Real Estate Markets: Recent Evidence and Issues," The Journal of Real Estate Finance and Economics, Springer, vol. 66(2), pages 203-298, February.
    15. Huck, Nicolas & Mavoori, Hareesh & Mesly, Olivier, 2020. "The rationality of irrationality in times of financial crises," Economic Modelling, Elsevier, vol. 89(C), pages 337-350.
    16. Hwang, Ilwoo, 2018. "A theory of bargaining deadlock," Games and Economic Behavior, Elsevier, vol. 109(C), pages 501-522.
    17. Maarten C.W. Janssen & Santanu Roy, 2023. "Information Uncertainty," Departmental Working Papers 2306, Southern Methodist University, Department of Economics.
    18. Francesc Dilmé, 2024. "Bargaining with Binary Private Information," ECONtribute Discussion Papers Series 284, University of Bonn and University of Cologne, Germany.
    19. Justus Preusser & Andre Speit, 2023. "Transparency in Sequential Common-Value Trade," CRC TR 224 Discussion Paper Series crctr224_2023_487, University of Bonn and University of Mannheim, Germany.

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    More about this item

    Keywords

    Adverse selection; Market for lemons; Inspection; Time-on-the-market;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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