Endogenous Lemon Markets: Risky Choices and Adverse Selection

Avi Lichtig () and Ran Weksler

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

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.

Keywords: Lemons Markets; Endogenous Distribution (search for similar items in EconPapers)
JEL-codes: C72 D83 L15 (search for similar items in EconPapers)
Pages: 80
Date: 2023-03
New Economics Papers: this item is included in nep-gth and nep-mic
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Journal Article: Endogenous Lemon Markets: Risky Choices and Adverse Selection (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2023_404

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