Template-Type: ReDIF-Paper 1.0
Title: Endogenous Lemon Markets: Risky Choices and Adverse Selection
Author-Name: Avi Lichtig
Author-Email: alichtig@uni-bonn.de.
Author-Name: Ran Weksler
Author-Email: rweksler@econ.haifa.ac.il
Classification-JEL: C72, D83, L15
Keywords: Lemons Markets, Endogenous Distribution

Abstract: The severity of adverse selection depends, to a great extent, on the underlying distribution
of the asset. This distribution is commonly modeled as exogenous; however, in many realworld
applications, it is determined endogenously. A natural question in this context
is whether one can predict the severity of the adverse selection problem in such
environments. In this paper, we study a bilateral trade model in which the distribution
of the asset is affected by pre-trade unobservable actions of the seller. Analyzing
general trade mechanisms, we show that the seller’s actions are characterized by a riskseeking
disposition. In addition, we show that (location-independent) riskier underlying
distributions of the asset induce lower social welfare. That is, “lemon markets” arise
endogenously in these environments.

Note: 
Length: 80
Creation-Date: 2023-03
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp404
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2023_404