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Equilibrium in a decentralized market with adverse selection

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  • Max R. Blouin

Abstract

This paper deals with trade volume and distribution of surplus in markets subject to adverse selection. In a model where two qualities of a good exist, I show that if trade is decentralized (i.e. conducted via random pairwise meetings of agents), then all units of the good are traded, and all agents have positive ex-ante expected payoffs. This feature is present regardless of the quality distribution, and persists in the limit as discounting is made negligible. This offers a sharp contrast to models of centralized trade with adverse selection (Akerlof, Wilson). Copyright Springer-Verlag Berlin Heidelberg 2003

Suggested Citation

  • Max R. Blouin, 2003. "Equilibrium in a decentralized market with adverse selection," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 22(2), pages 245-262, September.
    • Handle: RePEc:spr:joecth:v:22:y:2003:i:2:p:245-262
    DOI: 10.1007/s00199-002-0294-7
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    Citations

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    Cited by:

    1. Santanu Roy, 2014. "Dynamic sorting in durable goods markets with buyer heterogeneity," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 47(3), pages 1010-1031, August.
    2. Daniel McFadden & Carlos Noton & Pau Olivella, "undated". "Remedies for Sick Insurance," Working Papers 620, Barcelona School of Economics.
    3. Taneli Mäkinen & Francesco Palazzo, 2017. "The double bind of asymmetric information in over-the-counter markets," Temi di discussione (Economic working papers) 1128, Bank of Italy, Economic Research and International Relations Area.
    4. Moreno, Diego & Wooders, John, 2016. "Dynamic markets for lemons: performance, liquidity, and policy intervention," Theoretical Economics, Econometric Society, vol. 11(2), May.
    5. Camargo, Braz & Lester, Benjamin, 2014. "Trading dynamics in decentralized markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 153(C), pages 534-568.
    6. Braz Camargo & Dino Gerardi & Lucas Maestri, 2020. "Efficiency in Decentralised Markets with Aggregate Uncertainty," The Economic Journal, Royal Economic Society, vol. 130(626), pages 446-461.
    7. Timo Vesala, 2008. "Middlemen And The Adverse Selection Problem," Bulletin of Economic Research, Wiley Blackwell, vol. 60(1), pages 1-11, January.
    8. Bilancini, Ennio & Boncinelli, Leonardo, 2016. "Dynamic adverse selection and the supply size," European Economic Review, Elsevier, vol. 83(C), pages 233-242.
    9. Palazzo, Francesco, 2017. "Search costs and the severity of adverse selection," Research in Economics, Elsevier, vol. 71(1), pages 171-197.
    10. Klaus Kultti & Eeva Mauring & Juuso Vanhala & Timo Vesala, 2015. "Adverse Selection In Dynamic Matching Markets," Bulletin of Economic Research, Wiley Blackwell, vol. 67(2), pages 115-133, April.
    11. Ponsatí­, Clara & Sákovics, József, 2008. "Queues, not just mediocrity: Inefficiency in decentralized markets with vertical differentiation," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 998-1014, July.
    12. Barsanetti, Bruno & Camargo, Braz, 2022. "Signaling in dynamic markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 206(C).
    13. Clara Ponsati & Jozsef Sakovics, 2005. "Markets for professional services: queues and mediocrity," Edinburgh School of Economics Discussion Paper Series 133, Edinburgh School of Economics, University of Edinburgh.

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