Equilibrium and the Scope of Trade in the Market for Lemons

Posted: 27 Jul 2005

Date Written: April 2005

Abstract

Under the conditions conjectured by Akerlof (1970) as leading to extreme market failure, we demonstrate the existence of equilibrium with trade. This equilibrium state is unique if buyers value goods strictly more than sellers, and the least-valued good is always traded in that state.

Specializing to Akerlof's setting, we show that the least-valued good is the only one exchanged in the second-best equilibrium. Its value is known to all agents even when buyers are uninformed of the values of other commodities, and this good is sold at the first-best price.

Keywords: incomplete information, competitive equilibrium, market failure

JEL Classification: D01, D41, D46, D82, G18, L15

Suggested Citation

Faynzilberg, Peter S., Equilibrium and the Scope of Trade in the Market for Lemons (April 2005). Available at SSRN: https://ssrn.com/abstract=762426

Peter S. Faynzilberg (Contact Author)

The Aleph Group, LLC ( email )

DE 07024
United States

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