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Middlemen And The Adverse Selection Problem

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  • Timo Vesala

Abstract

We demonstrate that the coexistence of an uncoordinated search market and a middleman market may alleviate adverse selection in the trade of goods of different quality. Inability to conduct trade penalizes sellers of low‐quality goods disproportionately, encouraging them to trade via middlemen. A semi‐separating equilibrium exists when a sufficient number of sellers of low‐quality goods choose the middleman market to allow high‐quality goods to be successfully traded in the search market. The result may explain why a search market can survive alongside a coordinated market, a phenomenon characteristic, for example, of markets for used cars, housing and labour.

Suggested Citation

  • Timo Vesala, 2008. "Middlemen And The Adverse Selection Problem," Bulletin of Economic Research, Wiley Blackwell, vol. 60(1), pages 1-11, January.
    • Handle: RePEc:bla:buecrs:v:60:y:2008:i:1:p:1-11
    DOI: 10.1111/j.1467-8586.2007.00267.x
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    References listed on IDEAS

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    Cited by:

    1. Tara Mitchell, 2014. "Is Knowledge Power? Competition and Information in Agricultural Markets," The Institute for International Integration Studies Discussion Paper Series iiisdp456, IIIS.

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