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Dynamic Adverse Selection and the Supply Size

  • Ennio Bilancini

    ()

  • Leonardo Boncinelli

    ()

In this paper we examine the problem of dynamic adverse selection in a stylized market where the quality of goods is a seller’s private information while the realized distribution of qualities is public information. We show that in equilibrium all goods can be traded if the size of the supply is publicly available to market participants. Moreover, we show that if exchanges can take place frequently enough, then agents roughly enjoy the entire potential surplus from exchanges. We illustrate these findings with a dynamic model of trade where buyers and sellers repeatedly interact over time. We also identify circumstances under which only full trade equilibria exist. Further, we give conditions for full trade to obtain when the realized distribution of qualities is not public information and when new goods enter the market at later stages.

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File URL: http://www.recent.unimore.it/wp/RECent-wp99.pdf
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Paper provided by University of Modena and Reggio E., Dept. of Economics "Marco Biagi" in its series Center for Economic Research (RECent) with number 099.

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Length: pages 52
Date of creation: Apr 2014
Date of revision:
Handle: RePEc:mod:recent:099
Contact details of provider: Web page: http://www.recent.unimore.it/

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