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Bargaining over a Divisible Good in the Market for Lemons

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  • Dino Gerardi
  • Lucas Maestri

Abstract

A seller dynamically sells a divisible good to a buyer. It is common knowledge that there are gains from trade and that the gains per unit are decreasing. Payoffs are interdependent as in Akerlof's market for lemons. The seller is informed about the good's quality. The buyer makes an offer in every period and learns about the good's quality only through the seller's behavior. We characterize the stationary equilibrium when the time between offers is small. The owner of a high-quality good sells it in dribs and drabs, whereas the owner of a low-quality good constantly randomizes between selling small pieces and accepting an offer for all the remaining units. We use this characterization to analyze the limiting equilibrium outcome as the good becomes more divisible. We prove that there is slow trading: a valuable good is smoothly sold over time. In contrast, the good is never partially sold when gains per unit are increasing.

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Bibliographic Info

Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 312.

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Length: 66 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:cca:wpaper:312

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Related research

Keywords: bargaining; divisible objects; interdependent valuations; market for lemons.;

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  1. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, January.
  2. Diego Moreno & John Wooders, 2013. "Dynamic Markets for Lemons: Performance, Liquidity, and Policy Intervention," Working Paper Series 5, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
  3. Daniel R. Vincent, 1988. "Bargaining with Common Values," Discussion Papers 775, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Ben Lester & Braz Camargo, 2011. "Trading Dynamics in Decentralized Markets with Adverse Selection," 2011 Meeting Papers 1300, Society for Economic Dynamics.
  5. Samuelson, William F, 1984. "Bargaining under Asymmetric Information," Econometrica, Econometric Society, vol. 52(4), pages 995-1005, July.
  6. Admati, Anat R & Perry, Motty, 1991. "Joint Projects without Commitment," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 259-76, April.
  7. Evans, Robert, 1989. "Sequential Bargaining with Correlated Values," Review of Economic Studies, Wiley Blackwell, vol. 56(4), pages 499-510, October.
  8. Brendan Daley & Brett Green, 2012. "Waiting for News in the Market for Lemons," Econometrica, Econometric Society, vol. 80(4), pages 1433-1504, 07.
  9. Gul, Faruk & Sonnenschein, Hugo, 1988. "On Delay in Bargaining with One-Sided Uncertainty," Econometrica, Econometric Society, vol. 56(3), pages 601-11, May.
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