Learning by Owning in a Lemons Market

57 Pages Posted: 20 Jun 2016 Last revised: 23 Jan 2019

See all articles by Jordan Martel

Jordan Martel

Indiana University Bloomington

Kenneth S Mirkin

University of Edinburgh

Brian Waters

University of Colorado, Boulder

Date Written: November 20, 2018

Abstract

We study market dynamics when an owner learns over time about the quality of her asset. Since this information is private, the owner sells strategically to a less informed buyer following sufficient negative information. In response, market prices feature a "U-shape" relative to the length of ownership prior to sale. As the owner initially acquires greater private information, buyers suffer greater adverse selection, and prices fall accordingly. Eventually, the probability of a strategic sale grows thin, and prices subsequently rebound. We provide evidence of a U-shaped price path in the markets for residential real estate, private equity, and construction equipment.

Keywords: Private learning, Experimentation, Dynamic markets, Adverse selection

JEL Classification: D82, D83, C73

Suggested Citation

Martel, Jordan and Mirkin, Kenneth S and Waters, Brian, Learning by Owning in a Lemons Market (November 20, 2018). Available at SSRN: https://ssrn.com/abstract=2798088 or http://dx.doi.org/10.2139/ssrn.2798088

Jordan Martel

Indiana University Bloomington ( email )

100 South Indiana Ave.
Bloomington, IN 47405
United States

Kenneth S Mirkin

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

Brian Waters (Contact Author)

University of Colorado, Boulder ( email )

1070 Edinboro Drive
Boulder, CO 80309
United States
3034921703 (Phone)

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