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Continuous Time Trading in Markets with Adverse Selection

Author

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  • Maarten C.W. Janssen
  • Vladimir Karamychev

    (Erasmus University Rotterdam)

Abstract

We investigate the nature of the adverse selection problem in a market for adurable goodwhere trading and entry of new buyers and sellers takes place in continuoustime. In thecontinuous time model equilibria with properties that are qualitativelydifferent from thestatic equilibria, emerge. Typically, in equilibria of the continuous timemodel sellers withhigher quality wait in order to sell and wait more than sellers of lower qualitydo. Amongother things, we show that for any distribution of quality there exist aninfinite number ofcyclical equilibria where all goods are traded within a finite time afterentering the market.This holds true even if the good is not perfectly durable or when buyers are notrisk-neutral.

Suggested Citation

  • Maarten C.W. Janssen & Vladimir Karamychev, 2000. "Continuous Time Trading in Markets with Adverse Selection," Tinbergen Institute Discussion Papers 00-109/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20000109
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    References listed on IDEAS

    as
    1. Maarten C. W. Janssen & Vladimir A. Karamychev, 2002. "Cycles and multiple equilibria in the market for durable lemons," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 20(3), pages 579-601.
    2. Alessandro Lizzeri, 1999. "Information Revelation and Certification Intermediaries," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 214-231, Summer.
    3. Wilson, Charles A, 1979. "Equilibrium and Adverse Selection," American Economic Review, American Economic Association, vol. 69(2), pages 313-317, May.
    4. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    5. Charles Wilson, 1980. "The Nature of Equilibrium in Markets with Adverse Selection," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 108-130, Spring.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Dynamic Trading; Asymmetric Information; Entry; Durable Goods;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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