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The efficiency of decentralized and centralized markets for lemons

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Abstract

In markets with adverse selection, when average quality is low and frictions are small decentralized trade produces a greater surplus than predicted by the competitive model: under decentralized trade some high-quality units of the good trade whereas, due to the "lemons problem", only low-quality units trade in the competitive equilibrium. This suggests a reason why these markets are often decentralized. Remarkably, under some conditions payoffs are competitive as frictions vanish, even though all qualities trade.

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  • Wooders, John, 2001. "The efficiency of decentralized and centralized markets for lemons," UC3M Working papers. Economics we014005, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:we014005
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    Cited by:

    1. Shneyerov, Artyom & Wong, Adam Chi Leung, 2011. "The role of private information in dynamic matching and bargaining: Can it be good for efficiency?," Economics Letters, Elsevier, vol. 112(1), pages 128-131, July.

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