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Competing Mechanisms in Markets for Lemons

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  • Auster, Sarah; Gottardi, Piero
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.

Suggested Citation

  • Auster, Sarah; Gottardi, Piero, 2016. "Competing Mechanisms in Markets for Lemons," Economics Working Papers ECO2016/01, European University Institute.
    • Handle: RePEc:eui:euiwps:eco2016/01
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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. James Albrecht & Xiaoming Cai & Pieter Gautier & Susan Vroman, 2024. "Competitive search with private information: Can price signal quality?," Tinbergen Institute Discussion Papers 24-054/VI, Tinbergen Institute.
    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

    Adverse Selection; Trade Mechanisms; Competitive Search; Welfare;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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