Physical Depreciation and Discounting in Dynamic Markets with Adverse Selection

We investigate the nature of the adverse selection problem in a market for a durable good where trading and entry of new buyers and sellers takes place in continuous time. We focus on the role of the interest rate and physical depreciation. We show that when the physical depreciation rate is relatively small, infinitely many equilibria exist where all goods are traded within finite time after their appearance in the market. In contrast, when the physical depreciation rate is relatively large the trade of new goods will stop in any equilibrium after a finite moment in time. At intermediate values, stationary equilibria, different from the static equilibria, may emerge. For any given level of the relative depreciation rate the interest rate only determines the speed of evolution along the equilibrium path.