Equilibrium in a decentralized market with adverse selection

Abstract

This paper deals with trade volume and distribution of surplus in markets subject to adverse selection. In a model where two qualities of a good exist, I show that if trade is decentralized (i.e. conducted via random pairwise meetings of agents), then all units of the good are traded, and all agents have positive ex-ante expected payoffs. This feature is present regardless of the quality distribution, and persists in the limit as discounting is made negligible. This offers a sharp contrast to models of centralized trade with adverse selection (Akerlof, Wilson). Copyright Springer-Verlag Berlin Heidelberg 2003Keywords and Phrases:Adverse selection, Lemons, Pairwise meetings, Decentralized trading., JEL Classification Numbers:C73, D82.,

Internet Exchanges for Used Goods: An Empirical Analysis of Trade Patterns and Adverse Selection

“…First, prior work primarily focuses on theories of adverse selection in static markets where price is a sorting mechanism. In contrast, our paper tests the theory in the recent literature on dynamic markets (Janssen and Karamychev 2002, Blouin 2003, Janssen and Roy 2004 where time is a sorting mechanism in addition to price. The basic idea of time-based sorting is that sellers face a tradeoff between making a quick sale and obtaining a high price.…”

“…The prior literature has shown that in a dynamic market for durable goods wherein goods are continuously traded, there exist equilibria where all sellers, no matter how high the quality of their good, may be able to trade in finite time (Stolyarov 2002, Janssen and Roy 2004, Janssen and Karamychev 2002, Blouin 2003. Although certain indicators like the seller's self-reported product quality and seller reputation ratings are available to buyers, information asymmetries are likely to persist in electronic markets because buyers and sellers are separated by time and space.…”

“…Recent theoretical work (Janssen and Karamychev 2002, Blouin 2003, Janssen and Roy 2004 indicate that sale time plays an important role in sorting the effects of information uncertainty in such markets. In a static market, low quality goods drive out high quality goods through adverse selection (Akerlof 1970).…”

Remedies for Sick Insurance

“…The usual form of minimum coverage requirements is that they mandate standardized contracts or require that contracts offered in the market encompass specified lists of conditions and procedures, providers, and covered persons. For example, Medicare Part D prescription drug coverage in the United States is offered by to competitive Nash behavior of suppliers have been considered by Miyazaki (1977), Crocker-Snow (1985ab), Cho-Kreps (1987), Hellwig (1987), Rose (1993), Gale (1992Gale ( , 1996, Allard et al (1997), Lopez-Cunat (2000), Villeneuve (2000), Dionne et al (2001), Blouin (2003), Hendel (2005), and Chade-Schlee (2011). Hendren (2011 uses the tools of mechanism design to establish a critical condition for the existence of any incentive-compatible design for a decentralized health insurance market, and gives evidence that this condition may not be satisfied.…”

Trading Dynamics in Decentralized Markets with Adverse Selection

“…An important, open question that we intend to address is whether one of these policies implies larger efficiency gains than the other. Moreno and Wooders (2002) and Blouin (2003) for analysis of this issue in a one-time entry model. Janssen and Roy (2002) also study a dynamic environment with asymmetric information and interdependent values; however, they assume is assumed takes place in a sequence of Walrasian markets.…”