Revisiting the Lemons Market
Posted: 14 Jan 2001
This paper 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 which is relevant for their own transaction. Whether market performance increases or decreases in the number of uninformed sellers is shown to depend on (a) the potential gains from trade in the market and (b) the average quality of the sellers' information structure. Finally, we show that any presumed information structure can be endogenized under suitable assumptions on market parameters and the information technology available to a seller.
Keywords: Market Performance, (Endogenous) Information Structure, Adverse Selection
JEL Classification: D82, L15
Suggested Citation: Suggested Citation