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Overlapping Generations of Cars

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Abstract

The paper analyzes the dynamics of a resale market subject to adverse selection. Infinitely-lived agents deal in cars which last two periods. Car quality is exogenous and known only to sellers. I prove existence of steady-state equilibrium, then provide a full characterization: number of equilibria, stability, efficiency. Of note: the economy may be confined to one stable equilibrium when another exists which is Pareto-superior. I reconsider the model with the information asymmetry removed, and show that equilibrium in this case must be unique. The symmetric-information case is in general not Pareto-superior to the asymmetric-information one.

Cet article analyse un marché de revente sujet à la sélection adverse. Des agents à vie infinie achètent et vendent des voitures qui ne durent que deux périodes. La qualité d'une voiture est exogène et n'est connue que de son propriétaire. Je prouve l'existence d'un équilibre à l'état stationnaire, et fournis ensuite une caractérisation complète: nombre d'équilibres, stabilité, efficacité. A remarquer: l'économie peut se trouver à un équilibre stable alors qu'un autre existe qui lui est Pareto-supérieur. Je reconsidère le modèle sans l'asymétrie d'information, et démontre que dans ce cas-ci l'équilibre doit être unique. Le cas avec information symétrique n'est en général pas Pareto-supérieur à celui avec information asymétrique.

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File URL: http://www.unites.uqam.ca/eco/CREFE/cahiers/cah117.ps
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File URL: http://www.unites.uqam.ca/eco/CREFE/cahiers/cah117.pdf
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Bibliographic Info

Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 117.

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Length: 33 pages
Date of creation: Jul 2000
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Handle: RePEc:cre:crefwp:117

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Related research

Keywords: adverse selection; dynamic substitution; steady-state equilibrium;

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References

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  1. Wilson, Charles A, 1979. "Equilibrium and Adverse Selection," American Economic Review, American Economic Association, vol. 69(2), pages 313-17, May.
  2. Colin Rose, 1993. "Equilibrium and Adverse Selection," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 559-569, Winter.
  3. Kim, Jae-Cheol, 1985. "The Market for "Lemons" Reconsidered: A Model of the Used Car Market with Asymmetric Information," American Economic Review, American Economic Association, vol. 75(4), pages 836-43, September.
  4. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  5. Igal Hendel & Alessandro Lizzeri, 1999. "Adverse Selection in Durable Goods Markets," American Economic Review, American Economic Association, vol. 89(5), pages 1097-1115, December.
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  1. Christopher L. House & John V. Leahy, 2004. "An sS Model with Adverse Selection," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 581-614, June.
  2. G. Bloise & J.H. Dreze & H.M. Polemarchakis, 2002. "Money and Indeterminacy Over an Infinite Horizon," Working Papers 2002-12, Brown University, Department of Economics.

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