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Revisiting the Lemons Market

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  • Kessler, Anke S

Abstract

This article extends the standard competitive adverse selection model by allowing for qualitatively different information structures of agents on the informed side of the market. Using the stylized framework of the market for used cars, we examine the welfare properties of equilibria under the assumption that a fraction of the sellers remains uninformed about a parameter that is relevant for their own transaction. Whether market performance increases o decreases in the number of uninformed sellers is shown to depend on (1) the potential gains from trade in the market and (2) the average quality of the sellers information structure.

Suggested Citation

  • Kessler, Anke S, 2001. "Revisiting the Lemons Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 25-41, February.
    • Handle: RePEc:ier:iecrev:v:42:y:2001:i:1:p:25-41
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    Citations

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    Cited by:

    1. Belleflamme, Paul & Peitz, Martin, 2014. "Asymmetric information and overinvestment in quality," European Economic Review, Elsevier, vol. 66(C), pages 127-143.
    2. Adriani, Fabrizio & Deidda, Luca G., 2009. "Price signaling and the strategic benefits of price rigidities," Games and Economic Behavior, Elsevier, vol. 67(2), pages 335-350, November.
    3. Blouin, Max R., 2003. "Quality undersupply and oversupply," Journal of Economic Theory, Elsevier, vol. 109(1), pages 130-139, March.
    4. Navin Kartik & Weijie Zhong, 2023. "Lemonade from Lemons: Information Design and Adverse Selection," Papers 2305.02994, arXiv.org.
    5. Bilancini, Ennio & Boncinelli, Leonardo, 2016. "Dynamic adverse selection and the supply size," European Economic Review, Elsevier, vol. 83(C), pages 233-242.
    6. Peter Wagner, 2023. "Seller experimentation and trade," Review of Economic Design, Springer;Society for Economic Design, vol. 27(2), pages 337-357, June.
    7. Carroll, Gabriel, 2016. "Informationally robust trade and limits to contagion," Journal of Economic Theory, Elsevier, vol. 166(C), pages 334-361.
    8. F. Adriani & LG Deidda, 2006. "The Monopolist's Blues," Working Paper CRENoS 200611, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    9. Schneider, Mark & Stephenson, Daniel Graydon, 2021. "Bargains, price signaling, and efficiency in markets with asymmetric information," Games and Economic Behavior, Elsevier, vol. 128(C), pages 160-181.
    10. Athnos, April, 2020. "What Lies Beneath? An Analysis of “Time of Sale” Well and Septic Inspection Failures," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304619, Agricultural and Applied Economics Association.
    11. Salmi, Mabrouka, 2022. "An Attempt at a literature review of “The Market for Lemons” Theory and a Case Study in Algerian Local E-commerce," MPRA Paper 112390, University Library of Munich, Germany.
    12. Bart Wilson & Arthur Zillante, 2010. "More Information, More Ripoffs: Experiments with Public and Private Information in Markets with Asymmetric Information," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 36(1), pages 1-16, February.

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