Dynamic Markets for Lemons: Performance, Liquidity, and Policy Intervention
AbstractEven though adverse selection pervades markets for real goods and financial assets, equilibrium in such markets is not well understood. What are the properties of equilibrium in dynamic markets for lemons? What determines the liquidity of a good? Which market structures perform better, decentralized ones, in which trade is bilateral and prices are negotiated, or centralized ones, in which trade is multilateral and agents are price-takers? Is there a role for government intervention? We show that when the horizon is finite and frictions are small, decentralized markets are more liquid and perform better than centralized markets. Moreover, the surplus realized is above the static competitive surplus, and decreases as the horizon grows larger, approaching the static competitive surplus as the horizon becomes infinite even if frictions are non-negligible. Subsidies on low quality or taxes on high quality raise surplus.
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Bibliographic InfoPaper provided by Economics Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 5.
Date of creation: 01 Mar 2013
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adverse selection; lemons markets; decentralised markets; equilibrium dynamics;
Other versions of this item:
- Diego Moreno & John Wooders, 2012. "Dynamic markets for lemons : performance, liquidity, and policy intervention," Economics Working Papers we1226, Universidad Carlos III, Departamento de Economía.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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