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Information and the Market for Lemons

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Jonathan Levin

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Abstract

March 2001

This paper revisits Akerlof's (1970) classic adverse selection market and asks the following question: do greater information asymmetries reduce the gains from trade? Perhaps surprisingly, the answer is no. Better information on the selling side worsens the "buyer's curse," thus lowering demand, but may shift supply as well. Whether trade increases or decreases depends on the relative sizes of these effects. A characterization is given. On the other hand, improving the buyer's information --- i.e. making private information public --- unambiguously improves trade so long as market demand is downward sloping.

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Paper provided by Stanford University, Department of Economics in its series Working Papers with number 01004.

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Date of creation: Mar 2001
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Handle: RePEc:wop:stanec:01004

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  1. Paul Belleflamme & Martin Peitz, 2009. "Asymmetric Information and Overinvestment in Quality," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Benjamin Hermalin & Michael Katz, 2006. "Privacy, property rights and efficiency: The economics of privacy as secrecy," Quantitative Marketing and Economics, Springer, vol. 4(3), pages 209-239, September. [Downloadable!] (restricted)
  3. F. Adriani & LG. Deidda, 2006. "The Monopolist’s Blues," Working Paper CRENoS 200611, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia. [Downloadable!]
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