Revisiting the Lemons Market
AbstractThis paper extends the standard competitive adverse selection model by allowing for qualitatively different information structures of agents on the informed side of the market. Using the stylized framework of the market for used cars, we examine the welfare properties of equilibria under the assumption that a fraction of the sellers remains uninformed about a parameter which is relevant for his own transaction. The analysis suggests that market performance is in general nonmonotonic in the number of uninformed sellers. The extent to which the presence of less well informed sellers improves upon a situation where all sellers are perfectly informed is shown to depend crucially on (a) the potential gains from trade in the market and (b) the average quality of the sellers' information structure.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number 517.
Length: 19 pages
Date of creation: Sep 1996
Date of revision:
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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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Web page: http://www.bgse.uni-bonn.de
Market Performance; Information Structure; Adverse Selection;
Other versions of this item:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
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- Adriani, Fabrizio & Deidda, Luca G., 2009. "Price signaling and the strategic benefits of price rigidities," Games and Economic Behavior, Elsevier, vol. 67(2), pages 335-350, November.
- F. Adriani & LG. Deidda, 2006. "The Monopolist’s Blues," Working Paper CRENoS 200611, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
- Paul Belleflamme & Martin Peitz, 2009. "Asymmetric Information and Overinvestment in Quality," CESifo Working Paper Series 2619, CESifo Group Munich.
- Blouin, Max R., 2003. "Quality undersupply and oversupply," Journal of Economic Theory, Elsevier, vol. 109(1), pages 130-139, March.
- Bart Wilson & Arthur Zillante, 2010. "More Information, More Ripoffs: Experiments with Public and Private Information in Markets with Asymmetric Information," Review of Industrial Organization, Springer, vol. 36(1), pages 1-16, February.
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