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Decentralized trade mitigates the lemons problem

  • Diego Moreno

    ()

  • John Wooders

    ()

In markets with adverse selection, only low-quality units trade in the competitive equilibrium when the average quality of the good held by sellers is low. Under decentralized trade, however, both high and lowquality units trade, although with delay. Moreover, when frictions are small the surplus realized is greater than the (static) competitive surplus. Thus, decentralized trade mitigates the lemons problem. Remarkably, payoffs are competitive as frictions vanish, even though both high and low-quality units continue to trade and there is trade at several prices.

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File URL: http://e-archivo.uc3m.es/bitstream/10016/783/1/we071204.pdf
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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we071204.

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Date of creation: Mar 2007
Date of revision:
Handle: RePEc:cte:werepe:we071204
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