ADVERSE SELECTION IN DYNAMIC MATCHING MARKETS

Authors


  • We are grateful to Juha Kilponen, Nicolás Porteiro, and Juuso Välimäki, whose comments and guidance helped to improve the paper. We also thank seminar audiences at the Annual Meeting of the Finnish Society for Economic Research 2006, the Spring Meeting of Young Economists 2006, and ESEM 2006. Financial support from the Yrjö Jahnsson Foundation and the Academy of Finland is gratefully acknowledged. The usual disclaimer applies.

ABSTRACT

We study the Akerlofian adverse selection problem in a dynamic matching model where the competitive situation varies across different meetings. The ‘lemons principle’ is shown to limit the high quality sales within a wider range of quality distributions than in the Walrasian benchmark. High quality goods can nevertheless be traded, albeit less frequently than the low quality goods. For certain quality distributions, there exists a ‘partially pooling’ steady state where high quality sellers are active whenever at least two buyers compete for the good. Otherwise, the model features cycles in a sense that high quality goods are traded only in non-consecutive periods.

Ancillary