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Equilibrium in a decentralized market with adverse selection

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  • Max R. Blouin
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    Abstract

    This paper deals with trade volume and distribution of surplus in markets subject to adverse selection. In a model where two qualities of a good exist, I show that if trade is decentralized (i.e. conducted via random pairwise meetings of agents), then all units of the good are traded, and all agents have positive ex-ante expected payoffs. This feature is present regardless of the quality distribution, and persists in the limit as discounting is made negligible. This offers a sharp contrast to models of centralized trade with adverse selection (Akerlof, Wilson). Copyright Springer-Verlag Berlin Heidelberg 2003

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    File URL: http://hdl.handle.net/10.1007/s00199-002-0294-7
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    Bibliographic Info

    Article provided by Springer in its journal Economic Theory.

    Volume (Year): 22 (2003)
    Issue (Month): 2 (09)
    Pages: 245-262

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    Handle: RePEc:spr:joecth:v:22:y:2003:i:2:p:245-262

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    Related research

    Keywords: Keywords and Phrases:Adverse selection; Lemons; Pairwise meetings; Decentralized trading.; JEL Classification Numbers:C73; D82.;

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    Cited by:
    1. Braz Camargo & Benjamin Lester, 2011. "Trading dynamics in decentralized markets with adverse selection," Working Papers 11-36, Federal Reserve Bank of Philadelphia.
    2. Daniel McFadden & Carlos Noton & Pau Olivella, 2012. "Remedies for Sick Insurance," Working Papers 620, Barcelona Graduate School of Economics.
    3. 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.
    4. Ponsatí­, Clara & Sákovics, József, 2008. "Queues, not just mediocrity: Inefficiency in decentralized markets with vertical differentiation," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(4), pages 998-1014, July.
    5. Clara Ponsati & József Sákovics, 2005. "Markets for professional services: queues and mediocrity," ESE Discussion Papers 133, Edinburgh School of Economics, University of Edinburgh.

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