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Equilibrium in a Decentralized Market with Adverse Selection

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Abstract

This paper deals with volume of trade and distribution of surplus in markets subject to adverse selection. The benchmark case -- a variation of Akerlof's lemons model -- is that of a market where two qualities of a good are offered, in proportions such that, if a single price is required to clear the market, only the low-quality units of the good are traded. I show that if trade is decentralized, i.e. allowed to take place at different prices simultaneously in different parts of the market (via random pairwise meetings of agents), then all units of the good are traded, and all agents have positive ex-ante expected payoffs. This fundamental difference with the centralized benchmark does not diminish as discounting is gradually removed from the decentralized framework. The result holds for both the steady-state and non-steady-state versions of the model. Cet article traite du volume d'échange et de la distribution des gains dans les marchés sujets à la sélection adverse. Le point de repère est une variante du modèle d'Akerlof (1970) dans laquelle deux qualités différentes d'un bien sont disponibles sur le marché mais une seule, la moindre, n'est vendue à l'équilibre. Je démontre que si le mécanisme d'échange est décentralisé, c'est-à-dire que les échanges peuvent s'effectuer à différents prix dans différentes parties du marché (via l'appariement aléatoire des agents), alors toutes les unités du bien seront vendues à l'équilibre, peu importe leur qualité. De plus, tous les agents ont un paiement anticipé positif au départ. Ces différences fondamentales avec les résultats d'Akerlof ne s'effacent pas lorsque l'escomptage des paiements dans le marché décentralisé est graduellement éliminé. Ce résultat est obtenu dans deux versions du modèle décentralisé: une avec états stationnaires, l'autre sans.

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  • Max Blouin, 2001. "Equilibrium in a Decentralized Market with Adverse Selection," Cahiers de recherche CREFE / CREFE Working Papers 128, CREFE, Université du Québec à Montréal, revised Mar 2001.
  • Handle: RePEc:cre:crefwp:128
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    References listed on IDEAS

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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Serrano, Roberto, 2002. "Decentralized information and the Walrasian outcome: a pairwise meetings market with private values," Journal of Mathematical Economics, Elsevier, vol. 38(1-2), pages 65-89, September.
    3. Gale,Douglas, 2000. "Strategic Foundations of General Equilibrium," Cambridge Books, Cambridge University Press, number 9780521644105, March.
    4. Gale, Douglas M, 1986. "Bargaining and Competition Part I: Characterization," Econometrica, Econometric Society, vol. 54(4), pages 785-806, July.
    5. Serrano, Roberto & Yosha, Oved, 1993. "Information Revelation in a Market with Pairwise Meetings: The One Sided Information Case," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(3), pages 481-499, July.
    6. Gale, Douglas, 1987. "Limit theorems for markets with sequential bargaining," Journal of Economic Theory, Elsevier, vol. 43(1), pages 20-54, October.
    7. Martin J. Osborne & Ariel Rubinstein, 2005. "Bargaining and Markets," Levine's Bibliography 666156000000000515, UCLA Department of Economics.
    8. Oved Yosha & Roberto Serrano, 1996. "Welfare analysis of a market with pairwise meetings and asymmetric information (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(1), pages 167-175.
    9. Wilson, Charles A, 1979. "Equilibrium and Adverse Selection," American Economic Review, American Economic Association, vol. 69(2), pages 313-317, May.
    10. Gale, Douglas M, 1986. "Bargaining and Competition Part II: Existence," Econometrica, Econometric Society, vol. 54(4), pages 807-818, July.
    11. Max R. Blouin & Roberto Serrano, 2001. "A Decentralized Market with Common Values Uncertainty: Non-Steady States," Review of Economic Studies, Oxford University Press, vol. 68(2), pages 323-346.
    12. Rubinstein, Ariel & Wolinsky, Asher, 1985. "Equilibrium in a Market with Sequential Bargaining," Econometrica, Econometric Society, vol. 53(5), pages 1133-1150, September.
    13. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    14. Wolinsky, Asher, 1990. "Information Revelation in a Market with Pairwise Meetings," Econometrica, Econometric Society, vol. 58(1), pages 1-23, January.
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    Cited by:

    1. Braz Camargo & Dino Gerardi & Lucas Maestri, 2016. "Efficiency in Decentralized Markets with Aggregate Uncertainty," Carlo Alberto Notebooks 453, Collegio Carlo Alberto.
    2. Daniel McFadden & Carlos Noton & Pau Olivella, "undated". "Remedies for Sick Insurance," Working Papers 620, Barcelona Graduate 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. Anindya Ghose, 2005. "Used Good Trade Patterns: A Cross-Country Comparison of Electronic Secondary Markets," Working Papers 05-19, NET Institute, revised Oct 2005.
    5. 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.
    6. Palazzo, Francesco, 2017. "Search costs and the severity of adverse selection," Research in Economics, Elsevier, vol. 71(1), pages 171-197.
    7. Moreno, Diego & Wooders, John, 2016. "Dynamic markets for lemons: performance, liquidity, and policy intervention," Theoretical Economics, Econometric Society, vol. 11(2), May.
    8. Moreno, Diego & Wooders, John, 2001. "The efficiency of decentralized and centralized markets for lemons," UC3M Working papers. Economics we014005, Universidad Carlos III de Madrid. Departamento de Economía.
    9. Clara Ponsati & Jozsef Sakovics, 2005. "Markets for professional services: queues and mediocrity," ESE Discussion Papers 133, Edinburgh School of Economics, University of Edinburgh.
    10. Bilancini, Ennio & Boncinelli, Leonardo, 2016. "Dynamic adverse selection and the supply size," European Economic Review, Elsevier, vol. 83(C), pages 233-242.

    More about this item

    Keywords

    adverse selection; lemons; decentralized trading; pairwise meetings;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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