Competing Mechanisms in Markets for Lemons

Piero Gottardi and Sarah Auster
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Sarah Auster: Bocconi, IGIER

No 264, 2016 Meeting Papers from Society for Economic Dynamics

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 themselves at the search stage across different mechanisms. Compared to such sorting equilibria, our equilibrium yields a higher surplus for most, but not all, parameter specifications.

Date: 2016
New Economics Papers: this item is included in nep-com and nep-mic
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Citations: View citations in EconPapers (6)

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Working Paper: Competing Mechanisms in Markets for Lemons (2016)
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