The efficiency of decentralized and centralized markets for lemons
Diego Moreno () and
John Wooders ()
UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía
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.
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