MIDDLEMEN AND THE ADVERSE SELECTION PROBLEM

Timo Vesala

Bulletin of Economic Research, 2008, vol. 60, issue 1, 1-11

Abstract: We demonstrate that the coexistence of an uncoordinated search market and a middleman market may alleviate adverse selection in the trade of goods of different quality. Inability to conduct trade penalizes sellers of low‐quality goods disproportionately, encouraging them to trade via middlemen. A semi‐separating equilibrium exists when a sufficient number of sellers of low‐quality goods choose the middleman market to allow high‐quality goods to be successfully traded in the search market. The result may explain why a search market can survive alongside a coordinated market, a phenomenon characteristic, for example, of markets for used cars, housing and labour.

Date: 2008
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https://doi.org/10.1111/j.1467-8586.2007.00267.x

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