Markets with Within-Type Adverse Selection

Anh Nguyen and Teck Yong Tan

American Economic Journal: Microeconomics, 2023, vol. 15, issue 2, 699-726

Abstract: We study bilateral trade with a seller owning multiple units of a good, where each unit is of binary quality. The seller privately knows her "type"—defined by the number of lemons that she own—and which units in her endowments are the lemons ("within-type adverse selection"). We characterize the set of informationally constrained Pareto optimal allocations and show that every such allocation must involve a trade characterized by a threshold λ∗, with types having less (more) than λ∗ units of lemons selling only their lemons (selling their entire endowment). We provide conditions for a distribution shift that give Pareto-improving allocations.

JEL-codes: D82 D86 L15 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1257/mic.20210112

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