Revisiting the Lemons Market

Posted: 14 Jan 2001

See all articles by Anke S. Kessler

Anke S. Kessler

Simon Fraser University (SFU) - Department of Economics; University of Bonn - Economic Science Area; Centre for Economic Policy Research (CEPR)

Abstract

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

Kessler, Anke S., Revisiting the Lemons Market. International Economic Review, Vol. 42, No. 1, 2001. Available at SSRN: https://ssrn.com/abstract=254091

Anke S. Kessler (Contact Author)

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
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Canada
604-291-3443 (Phone)
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University of Bonn - Economic Science Area ( email )

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Germany
+49 228 739 246 (Phone)
+49 228 739 221 (Fax)

HOME PAGE: http://www.wipol.uni-bonn.de/~kessler/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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