Date: 2015
Type: Working Paper
Competing mechanisms in markets for lemons
Working Paper, EUI ECO, 2016/01
AUSTER, Sarah, GOTTARDI, Piero, Competing mechanisms in markets for lemons, EUI ECO, 2016/01 - https://hdl.handle.net/1814/38811
Retrieved from Cadmus, EUI Research Repository
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.
Cadmus permanent link: https://hdl.handle.net/1814/38811
ISSN: 1725-6704
Series/Number: EUI ECO; 2016/01