Equilibrium in a decentralized market with adverse selection
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
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Volume (Year): 22 (2003)
Issue (Month): 2 (09)
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