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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. Daniel McFadden & Carlos Noton & Pau Olivella, "undated". "Remedies for Sick Insurance," Working Papers 620, Barcelona Graduate School of Economics.
    2. 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.
    3. Camargo, Braz & Lester, Benjamin, 2014. "Trading dynamics in decentralized markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 153(C), pages 534-568.
    4. Lucas Maestri & Dino Gerardi & Braz Camargo, 2016. "Efficiency in Decentralized Markets with Aggregate Uncertainty," 2016 Meeting Papers 103, Society for Economic Dynamics.
    5. Bilancini, Ennio & Boncinelli, Leonardo, 2016. "Dynamic adverse selection and the supply size," European Economic Review, Elsevier, vol. 83(C), pages 233-242.
    6. Palazzo, Francesco, 2017. "Search costs and the severity of adverse selection," Research in Economics, Elsevier, vol. 71(1), pages 171-197.
    7. 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.
    8. 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.
    9. Clara Ponsati & Jozsef Sakovics, 2005. "Markets for professional services: queues and mediocrity," ESE Discussion Papers 133, Edinburgh School of Economics, University of Edinburgh.

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