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Decentralized trade mitigates the lemons problem

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  • Moreno, Diego
  • Wooders, John

Abstract

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.

Suggested Citation

  • Moreno, Diego & Wooders, John, 2007. "Decentralized trade mitigates the lemons problem," UC3M Working papers. Economics we071204, Universidad Carlos III de Madrid. Departamento de Economía.
  • Handle: RePEc:cte:werepe:we071204
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    Cited by:

    1. Adriani, Fabrizio & Deidda, Luca G., 2011. "Competition and the signaling role of prices," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 412-425, July.
    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. Kultti, Klaus, 2017. "Experience goods and provision of quality," Economics Discussion Papers 2017-19, Kiel Institute for the World Economy (IfW).
    4. Moreno, Diego & Wooders, John, 2016. "Dynamic markets for lemons: performance, liquidity, and policy intervention," Theoretical Economics, Econometric Society, vol. 11(2), May.
    5. Camargo, Braz & Lester, Benjamin, 2014. "Trading dynamics in decentralized markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 153(C), pages 534-568.
    6. Lucas Maestri & Dino Gerardi & Braz Camargo, 2016. "Efficiency in Decentralized Markets with Aggregate Uncertainty," 2016 Meeting Papers 103, Society for Economic Dynamics.
    7. Bilancini, Ennio & Boncinelli, Leonardo, 2016. "Dynamic adverse selection and the supply size," European Economic Review, Elsevier, vol. 83(C), pages 233-242.
    8. repec:eee:jetheo:v:169:y:2017:i:c:p:365-399 is not listed on IDEAS
    9. Palazzo, Francesco, 2017. "Search costs and the severity of adverse selection," Research in Economics, Elsevier, vol. 71(1), pages 171-197.
    10. Gerard Ballot & Antoine Mandel & Annick Vignes, 2015. "Agent-based modeling and economic theory: where do we stand?," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(2), pages 199-220, October.
    11. 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.

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    Keywords

    Market for lemons;

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