Learning by Owning in a Lemons Market
57 Pages Posted: 20 Jun 2016 Last revised: 23 Jan 2019
Date Written: November 20, 2018
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: Suggested Citation