Decentralized trade mitigates the lemons problem

Diego Moreno () and John Wooders ()

Economics Working Papers from Universidad Carlos III, Departamento de Economía

Abstract: In markets with adverse selection, only low-quality units trade in the competitive equilibrium when the average quality of the good held by sellers is low. Under decentralized trade, however, both high and lowquality units trade, although with delay. Moreover, when frictions are small the surplus realized is greater than the (static) competitive surplus. Thus, decentralized trade mitigates the lemons problem. Remarkably, payoffs are competitive as frictions vanish, even though both high and low-quality units continue to trade and there is trade at several prices.

New Economics Papers: this item is included in nep-int
Date: Written 2007-03

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