Moldy Lemons and Market Shutdowns

Jin-Wook Chang and Matthew Darst

No 2022-013, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper studies competitive market shutdowns due to adverse selection, where sellers post nonexclusive menus of contracts. We first show that the presence of the worst type of agents (moldy lemons) causes markets to fail only if their mass is sufficiently large. We then show that a small mass of moldy lemons can lead to a large cascade of exits when buyers possess outside options. Our results suggest a parsimonious way of generating sudden market shutdowns without relying on institutional details or imposing additional structure on the model. Thus, the simple insights on the properties of market shutdowns we consider are applicable to many different markets and contexts.

Keywords: Asymmetric information; Market unraveling; Non-exclusive contracting (search for similar items in EconPapers)
JEL-codes: D52 D53 D82 E44 G32 (search for similar items in EconPapers)
Pages: 40 p.
Date: 2022-03-23
New Economics Papers: this item is included in nep-cfn, nep-com, nep-cta, nep-mac, nep-mic, nep-ore and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2022-13

DOI: 10.17016/FEDS.2022.013

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