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Dynamic markets for lemons : performance, liquidity, and policy intervention

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Abstract
Even though adverse selection pervades markets for real goods and financial assets, equilibrium in such markets is not well understood. What are the properties of equilibrium in dynamic markets for lemons? What determines the liquidity of a good? Which market structures perform better, decentralized ones, in which trade is bilateral and prices are negotiated, or centralized ones, in which trade is multilateral and agents are price‐takers? Is there a role for government intervention? We show that when the horizon is finite and frictions are small, decentralized markets are more liquid and perform better than centralized markets. Moreover, the surplus realized is above the static competitive surplus, and decreases as the horizon grows larger, approaching the static competitive surplus as the horizon becomes infinite even if frictions are non‐negligible. Subsidies on low quality or taxes on high quality raise surplus.

Suggested Citation

  • Wooders, John, 2012. "Dynamic markets for lemons : performance, liquidity, and policy intervention," UC3M Working papers. Economics we1226, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:we1226
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    2. William Fuchs & Andrzej Skrzypacz, 2019. "Costs and benefits of dynamic trading in a lemons market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 105-127, July.
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    Cited by:

    1. Auster, Sarah & Gottardi, Piero, 2019. "Competing mechanisms in markets for lemons," Theoretical Economics, Econometric Society, vol. 14(3), September.
    2. Taneli Mäkinen & Francesco Palazzo, 2017. "The double bind of asymmetric information in over-the-counter markets," Temi di discussione (Economic working papers) 1128, Bank of Italy, Economic Research and International Relations Area.
    3. William Fuchs & Andrzej Skrzypacz, 2019. "Costs and benefits of dynamic trading in a lemons market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 105-127, July.
    4. Camargo, Braz & Lester, Benjamin, 2014. "Trading dynamics in decentralized markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 153(C), pages 534-568.
    5. Huberto M. Ennis, 2019. "Interventions in Markets with Adverse Selection: Implications for Discount Window Stigma," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(7), pages 1737-1764, October.
    6. Bilancini, Ennio & Boncinelli, Leonardo, 2016. "Dynamic adverse selection and the supply size," European Economic Review, Elsevier, vol. 83(C), pages 233-242.
    7. Sylvain Mignot & Annick Vignes, 2019. "Trust somebody but choose carefully : an empirical analysis of social relationships on an exchange market," Working Papers hal-02005026, HAL.
    8. Kim, Kyungmin, 2017. "Information about sellers' past behavior in the market for lemons," Journal of Economic Theory, Elsevier, vol. 169(C), pages 365-399.
    9. Vincent Maurin, 2022. "Liquidity Fluctuations in Over‐the‐Counter Markets," Journal of Finance, American Finance Association, vol. 77(2), pages 1325-1369, April.
    10. Palazzo, Francesco, 2017. "Search costs and the severity of adverse selection," Research in Economics, Elsevier, vol. 71(1), pages 171-197.
    11. Davoodalhosseini, Seyed Mohammadreza, 2019. "Constrained efficiency with adverse selection and directed search," Journal of Economic Theory, Elsevier, vol. 183(C), pages 568-593.
    12. Dino Gerardi & Lucas Maestri & Ignacio Monzón, 2022. "Bargaining over a Divisible Good in the Market for Lemons," American Economic Review, American Economic Association, vol. 112(5), pages 1591-1620, May.
    13. Fuchs, William & Skrzypacz, Andrzej, 2015. "Government interventions in a dynamic market with adverse selection," Journal of Economic Theory, Elsevier, vol. 158(PA), pages 371-406.
    14. Barsanetti, Bruno & Camargo, Braz, 2022. "Signaling in dynamic markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 206(C).
    15. Vincent Maurin, 2016. "Liquidity Fluctuations in Over the Counter Markets," 2016 Meeting Papers 218, Society for Economic Dynamics.
    16. Heng Liu, 2020. "Deadlines in the market for lemons," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(2), pages 305-323, October.

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    More about this item

    Keywords

    Decentralized dynamic market for lemons;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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