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Competing Mechanisms in Markets for Lemons

Piero Gottardi ()

No ECO2016/01, Economics Working Papers from European University Institute

Abstract: We study the competitive equilibria in a market with adverse selection and search frictions. Uninformed buyers post general direct mechanisms and informed sellers choose where to direct their search. We demonstrate that there exists a unique equilibrium allocation and characterize its properties: all buyers post the same mechanism and a low quality object is traded whenever such object is present in a meeting. Sellers are thus pooled at the search stage and screened at the mechanism stage. If adverse selection is sufficiently severe, this equilibrium is constrained inefficient. Furthermore, the properties of the equilibrium differ starkly from the case where meetings are restricted to be bilateral, in which case in equilibrium sellers sort across different mechanisms at the search stage. Compared to such sorting equilibria, our equilibrium yields a higher surplus for most, but not all, parameter specifications.

Keywords: Adverse Selection; Trade Mechanisms; Competitive Search; Welfare (search for similar items in EconPapers)
JEL-codes: D82 D83 G14 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-com, nep-cta and nep-mic
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Related works:
Journal Article: Competing mechanisms in markets for lemons (2019) Downloads
Working Paper: Competing Mechanisms in Markets for Lemons (2016) Downloads
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