Decentralized Trade Mitigates the Lemons Problem

17 Pages Posted: 26 May 2010

See all articles by Diego Alejandro Moreno

Diego Alejandro Moreno

affiliation not provided to SSRN

John Wooders

New York University Abu Dhabi; University Technology Sydney

Abstract

In markets with adverse selection, only low-quality units trade in the competitive equilibrium when the average quality of the good held by sellers is low. We show that under decentralized trade, however, both high- and low-quality units trade, although with delay. Moreover, when frictions are small, the surplus realized is greater than the (static) competitive surplus. Thus, decentralized trade mitigates the lemons problem. Remarkably, payoffs are competitive as frictions vanish, even though both high- and low-quality units continue to trade, and there is trade at several prices.

Suggested Citation

Moreno, Diego Alejandro and Wooders, John C., Decentralized Trade Mitigates the Lemons Problem. International Economic Review, Vol. 51, Issue 2, pp. 383-399, May 2010. Available at SSRN: https://ssrn.com/abstract=1611953 or http://dx.doi.org/10.1111/j.1468-2354.2010.00584.x

Diego Alejandro Moreno (Contact Author)

affiliation not provided to SSRN

John C. Wooders

New York University Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates
+971 126285802 (Phone)

HOME PAGE: http://johnwooders.com

University Technology Sydney ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

HOME PAGE: http://johnwooders.com/

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