A Markovian model market—Akerlof’s lemons and the asymmetry of information

Paulo F.C. Tilles, Fernando F. Ferreira, Gerson Francisco, Carlos de B. Pereira and Flavia M. Sarti

Physica A: Statistical Mechanics and its Applications, 2011, vol. 390, issue 13, 2562-2570

Abstract: In this work we study an agent based model to investigate the role of asymmetric information degrees for market evolution. This model is quite simple and may be treated analytically since the consumers evaluate the quality of a certain good taking into account only the quality of the last good purchased plus her perceptive capacity β. As a consequence, the system evolves according to a stationary Markov chain. The value of a good offered by the firms increases along with quality according to an exponent α, which is a measure of the technology. It incorporates all the technological capacity of the production systems such as education, scientific development and techniques that change the productivity rates. The technological level plays an important role to explain how the asymmetry of information may affect the market evolution in this model. We observe that, for high technological levels, the market can detect adverse selection. The model allows us to compute the maximum asymmetric information degree before the market collapses. Below this critical point the market evolves during a limited period of time and then dies out completely. When β is closer to 1 (symmetric information), the market becomes more profitable for high quality goods, although high and low quality markets coexist. The maximum asymmetric information level is a consequence of an ergodicity breakdown in the process of quality evaluation.

Keywords: Markovian market model; Asymmetric information; Technological evolution (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:390:y:2011:i:13:p:2562-2570

DOI: 10.1016/j.physa.2011.03.007

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