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Competing mechanisms in markets for lemons

Author

Listed:
  • Auster, Sarah

    (Department of Decision Sciences and IGIER, Bocconi University)

  • Gottardi, Piero

    (Department of Economics, University of Essex)

Abstract
We study directed search equilibria in a decentralized market with adverse selection, where uninformed buyers post general trading mechanisms and informed sellers select one of them. We show that this has differing and significant implications with respect to the traditional approach, based on bilateral contracting between the parties. In equilibrium, all buyers post the same mechanism and low-quality sellers receive priority in any meeting with a buyer. Also, buyers make strictly higher profits with low- than with high-type sellers. When adverse selection is severe, the equilibrium features rationing and is constrained inefficient. Compared to the equilibrium with bilateral contracting, the equilibrium with general mechanisms yields a higher surplus for most, but not all, parameter specifications.

Suggested Citation

  • Auster, Sarah & Gottardi, Piero, 2019. "Competing mechanisms in markets for lemons," Theoretical Economics, Econometric Society, vol. 14(3), July.
  • Handle: RePEc:the:publsh:2921
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    Cited by:

    1. Naoki Aizawa & Soojin Kim & Serena Rhee, 2020. "Labor Market Screening and the Design of Social Insurance: An Equilibrium Analysis of the Labor Market for the Disabled," NBER Working Papers 27478, National Bureau of Economic Research, Inc.
    2. Cai, Xiaoming & Gautier, Pieter A. & Wolthoff, Ronald P., 2017. "Search frictions, competing mechanisms and optimal market segmentation," Journal of Economic Theory, Elsevier, vol. 169(C), pages 453-473.
    3. Attar, Andrea & Campioni, Eloisa & Piaser, Gwenaël, 2018. "On competing mechanisms under exclusive competition," Games and Economic Behavior, Elsevier, vol. 111(C), pages 1-15.
    4. Auster, Sarah & Gottardi, Piero, 2024. "Sorting versus screening in decentralized markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 220(C).
    5. Attar, Andrea & Campioni, Eloisa & Mariotti, Thomas & Piaser, Gwenaël, 2021. "Competing mechanisms and folk theorems: Two examples," Games and Economic Behavior, Elsevier, vol. 125(C), pages 79-93.
    6. Sarah Auster & Piero Gottardi & Ronald Wolthoff, 2022. "Simultaneous Search and Adverse Selection," Working Papers tecipa-734, University of Toronto, Department of Economics.
    7. Albrecht, James & Cai, Xiaoming & Gautier, Pieter A. & Vroman, Susan, 2024. "Competitive Search with Private Information: Can Price Signal Quality?," IZA Discussion Papers 17246, Institute of Labor Economics (IZA).
    8. Konstantinos Giannakas & Murray Fulton, 2020. "On the market for “Lemons”: quality provision in markets with asymmetric information," Palgrave Communications, Palgrave Macmillan, vol. 7(1), pages 1-6, December.

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    More about this item

    Keywords

    Competitive search; adverse selection;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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