Prices and quality signals

Mark Voorneveld and Jörgen Weibull

No 551, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: We consider a market-for-lemons model where the seller is a price setter, and, in addition to observing the price, the buyer receives a private noisy signal of the product's quality, such as when a prospective buyer looks at a car or house for sale, or when an employer interviews a job candidate. Sufficient conditions are given for the existence of perfect Bayesian equilibria, and we analyze equilibrium prices, trading probabilities and gains of trade. In particular, we identify separating equilibria with partial and full adverse selection as well as pooling equilibria. We also study the role of the buyer's signal precision, from being completely uninformative (as in standard adverse-selection models) to being completely informative (as under symmetric information). The robustness of results for these two boundary cases is analyzed, and comparisons are made with established models of monopoly and perfect competition.

Keywords: lemons; noisy quality signal; adverse selection (search for similar items in EconPapers)
JEL-codes: C72 D82 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2004-02-12, Revised 2004-07-06
New Economics Papers: this item is included in nep-ind and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:hastef:0551

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