THE EFFICIENCY OF DECENTRALIZED AND CENTRALIZED MARKETS FOR LEMONS

Diego Moreno () and John Wooders ()

Economics Working Papers from Universidad Carlos III, Departamento de Economía

Abstract: In markets with adverse selection, when average quality is low and frictions are small decentralized trade produces a greater surplus than predicted by the competitive model: under decentralized trade some high-quality units of the good trade whereas, due to the “lemons problem,” only low-quality units trade in the competitive equilibrium. This suggests a reason why these markets are often decentralized. Remarkably, under some conditions payoffs are competitive as frictions vanish, even though all qualities trade.

Date: 2001-01
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