Dynamic Trading in a Durable Good Market with Asymmetric Information

Abstract

We analyze a dynamic version of the Akerlof-Wilson "lemons" market in a competitive durable good setting. There is a fixed set of sellers with private information about the quality of their wares. The price mechanism sorts sellers of different qualities into different time periods-prices and average quality of goods traded increase over time. Goods of all qualities are traded in finite time. Market failure arises because of the waiting involved - particularly for sellers of better quality. The equilibrium path may exhibit intermediate breaks in trading.