SFB 303 Discussion Paper No. A - 517
Author: Kessler, Anke S.
Title: Revisiting the Lemons Market
Abstract: This paper extends the standard competitive adverse selection
model by allowing for qualitatively different information structures
of agents on the informed side of the market. Using the stylized
framework of the market for used cars, we examine the welfare
properties of equilibria under the assumption that a fraction of the
sellers remains uninformed about a parameter which is relevant for
his own transaction. The analysis suggests that market performance is
in general nonmonotonic in the number of uninformed sellers. The
extent to which the presence of less well informed sellers improves
upon a situation where all sellers are perfectly informed is shown to
depend crucially on (a) the potential gains from trade in the market
and (b) the average quality of the sellers' information structure.
Keywords: Market Performance, Information Structure, Adverse Selection
JEL-Classification-Number: D82, L15
Creation-Date: Revised Version: September 1996
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