Dynamic market for lemons with endogenous quality choice by the seller

Kawai, Keiichi (2014) Dynamic market for lemons with endogenous quality choice by the seller. Games and Economic Behavior, 84 152-162. doi:10.1016/j.geb.2014.01.011


Author Kawai, Keiichi
Title Dynamic market for lemons with endogenous quality choice by the seller
Journal name Games and Economic Behavior   Check publisher's open access policy
ISSN 0899-8256
1090-2473
Publication date 2014-03-01
Sub-type Article (original research)
DOI 10.1016/j.geb.2014.01.011
Volume 84
Start page 152
End page 162
Total pages 11
Place of publication Maryland Heights, MO, United States
Publisher Academic Press
Language eng
Formatted abstract
Highlights
• A dynamic market for lemons is analyzed.
• The quality of the good is endogenously determined by the seller.
• The possibility of trade creates a moral hazard problem.
• We show the possibility of trade does not contribute to the efficiency.

We analyze a dynamic market for lemons in which the quality of the good is endogenously determined by the seller. Potential buyers sequentially submit offers to one seller. The seller can make an investment that determines the quality of the item at the beginning of the game, which is unobservable to buyers. At the interim stage of the game, the information and payoff structures are the same as in the market for lemons. Our main result is that the possibility of trade does not create any efficiency gain if (i) the common discounting is low, and (ii) the static incentive constraints preclude the mutually agreeable ex-ante contract under which the trade happens with probability one. Our result does not depend on whether the offers by buyers are private or public.
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: Official 2015 Collection
School of Economics Publications
 
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Created: Wed, 05 Feb 2014, 00:11:45 EST by Alys Hohnen on behalf of School of Economics