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Equilibrium, Adverse Selection, and Statistical Distributions

Author

Listed:
  • Helton Saulo

    (Department of Economics - Federal University of Rio Grande do Sul / Porto Alegre, RS, Brazil)

  • Jeremias Leao

    (Department of Mathematics - Federal University of Piaui / Picos, PI, Brazil)

Abstract

This paper addresses the problem of multiple equilibria in markets with adverse selection. Akerlof (1970) identified an unique equilibrium of the total market failure under adverse selection. Posterioly, Wilson (1979, 1980) argued that the presence of adverse selection may lead to multiple equilibria. In particular, this paper extends the work of Rose (1993), who stated that the existence of multiple equilibria depends on the distribution of quality. Rose found that multiple equilibria are highly unlikely for most standard probability distributions. This work considers additional statistical distributions for quality. The simulation results suggest the existence of multiple equilibria when the quality follows a beta normal distribution.

Suggested Citation

  • Helton Saulo & Jeremias Leao, 2011. "Equilibrium, Adverse Selection, and Statistical Distributions," Economics Bulletin, AccessEcon, vol. 31(3), pages 2066-2074.
    • Handle: RePEc:ebl:ecbull:eb-11-00178
    as

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    References listed on IDEAS

    as
    1. Wilson, Charles A, 1979. "Equilibrium and Adverse Selection," American Economic Review, American Economic Association, vol. 69(2), pages 313-317, May.
    2. Panu Poutvaara & Andreas Wagener, 2004. "The Invisible Hand Plays Dice: Eventualities in Religious Markets," CESifo Working Paper Series 1238, CESifo.
    3. Colin Rose, 1993. "Equilibrium and Adverse Selection," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 559-569, Winter.
    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. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(3), pages 355-374.
    6. 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

    Adverse Selection; Multiple Equilibria; Statistical Distributions; Akerlof-Wilson Model.;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • D0 - Microeconomics - - General

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