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Markets with Within-Type Adverse Selection

  • Anh Nguyen
  • Teck Yong Tan
American Economic Journal: Microeconomics
vol. 15, no. 2, May 2023
(pp. 699-726)
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Abstract

We study bilateral trade with a seller owning multiple units of a good, where each unit is of binary quality. The seller privately knows her "type"—defined by the number of lemons that she own—and which units in her endowments are the lemons ("within-type adverse selection"). We characterize the set of informationally constrained Pareto optimal allocations and show that every such allocation must involve a trade characterized by a threshold λ∗, with types having less (more) than λ∗ units of lemons selling only their lemons (selling their entire endowment). We provide conditions for a distribution shift that give Pareto-improving allocations.

Citation

Nguyen, Anh, and Teck Yong Tan. 2023. "Markets with Within-Type Adverse Selection." American Economic Journal: Microeconomics, 15 (2): 699-726. DOI: 10.1257/mic.20210112

Additional Materials

JEL Classification

  • D82 Asymmetric and Private Information; Mechanism Design
  • D86 Economics of Contract: Theory
  • L15 Information and Product Quality; Standardization and Compatibility
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