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Bargaining over a Divisible Good in the Market for Lemons

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  • Dino Gerardi
  • Lucas Maestri

Abstract

A seller dynamically sells a divisible good to a buyer. It is common knowledge that there are gains from trade and that the gains per unit are decreasing. Payoffs are interdependent as in Akerlof's market for lemons. The seller is informed about the good's quality. The buyer makes an offer in every period and learns about the good's quality only through the seller's behavior. We characterize the stationary equilibrium when the time between offers is small. The owner of a high-quality good sells it in dribs and drabs, whereas the owner of a low-quality good constantly randomizes between selling small pieces and accepting an offer for all the remaining units. We use this characterization to analyze the limiting equilibrium outcome as the good becomes more divisible. We prove that there is slow trading: a valuable good is smoothly sold over time. In contrast, the good is never partially sold when gains per unit are increasing.

Suggested Citation

  • Dino Gerardi & Lucas Maestri, 2013. "Bargaining over a Divisible Good in the Market for Lemons," Carlo Alberto Notebooks 312, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:312
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    References listed on IDEAS

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    Cited by:

    1. Jean Tirole, 2016. "From Bottom of the Barrel to Cream of the Crop: Sequential Screening With Positive Selection," Econometrica, Econometric Society, vol. 84, pages 1291-1343, July.
    2. Guillaume Rocheteau & Lucie Lebeau & Tai-Wei Hu & Younghwan In, 2018. "Gradual Bargaining in Decentralized Asset Markets," Working Papers 181904, University of California-Irvine, Department of Economics.

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    More about this item

    Keywords

    bargaining; divisible objects; interdependent valuations; market for lemons.;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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