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Equilibrium in a Decentralized Market with Adverse Selection

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Abstract

This paper deals with volume of trade and distribution of surplus in markets subject to adverse selection. The benchmark case -- a variation of Akerlof's lemons model -- is that of a market where two qualities of a good are offered, in proportions such that, if a single price is required to clear the market, only the low-quality units of the good are traded. I show that if trade is decentralized, i.e. allowed to take place at different prices simultaneously in different parts of the market (via random pairwise meetings of agents), then all units of the good are traded, and all agents have positive ex-ante expected payoffs. This fundamental difference with the centralized benchmark does not diminish as discounting is gradually removed from the decentralized framework. The result holds for both the steady-state and non-steady-state versions of the model. Cet article traite du volume d'échange et de la distribution des gains dans les marchés sujets à la sélection adverse. Le point de repère est une variante du modèle d'Akerlof (1970) dans laquelle deux qualités différentes d'un bien sont disponibles sur le marché mais une seule, la moindre, n'est vendue à l'équilibre. Je démontre que si le mécanisme d'échange est décentralisé, c'est-à-dire que les échanges peuvent s'effectuer à différents prix dans différentes parties du marché (via l'appariement aléatoire des agents), alors toutes les unités du bien seront vendues à l'équilibre, peu importe leur qualité. De plus, tous les agents ont un paiement anticipé positif au départ. Ces différences fondamentales avec les résultats d'Akerlof ne s'effacent pas lorsque l'escomptage des paiements dans le marché décentralisé est graduellement éliminé. Ce résultat est obtenu dans deux versions du modèle décentralisé: une avec états stationnaires, l'autre sans.

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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 128.

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Length: 26 pages
Date of creation: Feb 2001
Date of revision: Mar 2001
Handle: RePEc:cre:crefwp:128

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Related research

Keywords: adverse selection; lemons; decentralized trading; pairwise meetings;

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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. Wolinsky, Asher, 1987. "Information Revelation in a Market with Pairwise Meetings," The Warwick Economics Research Paper Series (TWERPS) 284, University of Warwick, Department of Economics.
  3. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
  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. Max Blouin & Roberto Serrano, 1998. "A Decentralized Market with Common Values Uncertainty: Non-Steady States," Working Papers 98-5, Brown University, Department of Economics, revised 10 Aug 1998.
  6. Rubinstein, Ariel & Wolinsky, Asher, 1985. "Equilibrium in a Market with Sequential Bargaining," Econometrica, Econometric Society, vol. 53(5), pages 1133-50, September.
  7. Oved Yosha & Roberto Serrano, 1996. "Welfare analysis of a market with pairwise meetings and asymmetric information (*)," Economic Theory, Springer, vol. 8(1), pages 167-175.
  8. Gale, Douglas, 1987. "Limit theorems for markets with sequential bargaining," Journal of Economic Theory, Elsevier, vol. 43(1), pages 20-54, October.
  9. Roberto Serrano, 2000. "Decentralized Information and the Walrasian Outcome:A Pairwise Meetings Market with Private Values," Working Papers 2000-13, Brown University, Department of Economics.
  10. Gale, Douglas M, 1986. "Bargaining and Competition Part I: Characterization," Econometrica, Econometric Society, vol. 54(4), pages 785-806, July.
  11. Gale, Douglas M, 1986. "Bargaining and Competition Part II: Existence," Econometrica, Econometric Society, vol. 54(4), pages 807-18, July.
  12. Martin J. Osborne & Ariel Rubinstein, 2005. "Bargaining and Markets," Levine's Bibliography 666156000000000515, UCLA Department of Economics.
  13. Gale,Douglas, 2000. "Strategic Foundations of General Equilibrium," Cambridge Books, Cambridge University Press, number 9780521644105, October.
  14. Serrano, Roberto & Yosha, Oved, 1993. "Information Revelation in a Market with Pairwise Meetings: The One Sided Information Case," Economic Theory, Springer, vol. 3(3), pages 481-99, July.
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Citations

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Cited by:
  1. Daniel McFadden & Carlos Noton & Pau Olivella, 2012. "Remedies for Sick Insurance," Working Papers 620, Barcelona Graduate School of Economics.
  2. Diego Moreno & John Wooders, 2012. "Dynamic markets for lemons : performance, liquidity, and policy intervention," Economics Working Papers we1226, Universidad Carlos III, Departamento de Economía.
  3. Diego Moreno & John Wooders, 2001. "The Efficiency Of Decentralized And Centralized Markets For Lemons," Economics Working Papers we014005, Universidad Carlos III, Departamento de Economía.
  4. 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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