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The Nature of Equilibrium in Markets with Adverse Selection

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  • Charles Wilson
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    Abstract

    In the presence of adverse selection, how does the nature of the market equilibrium depend on the convention used to set the prices? Using a variant of Akerlof's model of the used car market, we examine the equilibrium of the model under three distinct conventions: (1) an auctioneer sets the price; (2) buyers set the price; (3) sellers set the price. Only in the case of the auctioneer is the equilibrium necessarily characterized by a single price which equates supply and demand. When either buyers or sellers set the price, a distribution of prices may emerge with excess supply at some or all of the prices. The analysis suggests that the allocation of goods in markets where adverse selection is a serious problem may be sensitive to the convention by which prices are set.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal Bell Journal of Economics.

    Volume (Year): 11 (1980)
    Issue (Month): 1 (Spring)
    Pages: 108-130

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    Handle: RePEc:rje:bellje:v:11:y:1980:i:spring:p:108-130

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    Cited by:
    1. Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, 1997. "New Evidence on the Money's Worth of Individual Annuities," NBER Working Papers 6002, National Bureau of Economic Research, Inc.
    2. Georg Meran & Reimund Schwarze, 2005. "Can Minimum Prices Assure the Quality of Professional Services?," Discussion Papers of DIW Berlin 531, DIW Berlin, German Institute for Economic Research.
    3. S. Sethi & Donald Schepers, 2014. "United Nations Global Compact: The Promise–Performance Gap," Journal of Business Ethics, Springer, vol. 122(2), pages 193-208, June.
    4. Clara Ponsati & József Sákovics, 2005. "Markets for professional services: queues and mediocrity," ESE Discussion Papers 133, Edinburgh School of Economics, University of Edinburgh.
    5. Gadi Barlevy & Pietro Veronesi, 1999. "On the Possibility of Stock Market Crashes in the Absence of Portfolio Insurance," Discussion Papers 1252, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Herweg, Fabian & Müller, Daniel, 2011. "Overconfidence in the Market for Lemons," Discussion Papers in Economics 12411, University of Munich, Department of Economics.
    7. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter.
    8. Andrew Weiss, 1985. "High School Graduation, Performance and Earnings," NBER Working Papers 1595, National Bureau of Economic Research, Inc.
    9. Carl Davidson & Nicholas Sly, 2013. "A Simple Model of Globalization, Schooling and Skill Acquisition," CESifo Working Paper Series 4394, CESifo Group Munich.
    10. Ponsatí­, Clara & Sákovics, József, 2008. "Queues, not just mediocrity: Inefficiency in decentralized markets with vertical differentiation," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 998-1014, July.
    11. Anindya Ghose, 2005. "Used Good Trade Patterns: A Cross-Country Comparison of Electronic Secondary Markets," Working Papers 05-19, NET Institute, revised Oct 2005.
    12. Stephan Marette, 2010. "Consumer confusion and multiple equilibria," Working Papers 37866, Institut National de la Recherche Agronomique, France.

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