Learning by Owning in a Lemons Market

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" and trading probabilities a "hump-shape" with respect 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 an informed sale shrinks, and prices subsequently rebound. We provide evidence consistent with our model in the markets for residential real estate, venture capital investments, and construction equipment.

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

JEL Classification: D82, D83, C73