We consider a market-for-lemons model where the seller is a price setter, and, in addition to observing the price, the buyer receives a private noisy signal of the product's quality, such as when a prospective buyer looks at a car or house for sale, or when an employer interviews a job candidate. Sufficient conditions are given for the existence of perfect Bayesian equilibria, and we analyze equilibrium prices, trading probabilities and gains of trade. In particular, we identify separating equilibria with partial and full adverse selection as well as pooling equilibria. We also study the role of the buyer's signal precision, from being completely uninformative (as in standard adverse-selection models) to being completely informative (as under symmetric information). The robustness of results for these two boundary cases is analyzed, and comparisons are made with established models of monopoly and perfect competition.
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Length: 33 pages Date of creation: 12 Feb 2004 Date of revision:
08 Mar 2004 Handle: RePEc:hhs:hastef:0551
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Find related papers by JEL classification: C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Hans Jørgen Jacobsen & Mogens Jensen & Birgitte Sloth, 1998.
"Evolutionary Learning in Signalling Games,"
CIE Discussion Papers
1999-14, University of Copenhagen. Department of Economics. Centre for Industrial Economics, revised Sep 1999.
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