On Durable Goods Markets with Entry and Adverse Selection
38 Pages Posted: 12 Jul 2004
Abstract
We investigate the nature of trading and sorting induced by the dynamic price mechanism in a competitive durable good market with adverse selection and exogenous entry of traders over time. The model is a dynamic version of Akerlof (1970). Identical cohorts of durable goods, whose quality is known only to potential sellers, enter the market over time. We show that there exists a cyclical equilibrium where all goods are traded within a finite number of periods after entry. Market failure is reflected in the length of waiting time before trade. The model also provides an explanation of market fluctuations.
JEL Classification: D82
Suggested Citation: Suggested Citation
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On Durable Goods Markets with Entry and Adverse Selection
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