ADVERSE SELECTION IN DYNAMIC MATCHING MARKETS
Article first published online: 3 JUL 2012
© 2012 The Authors. Bulletin of Economic Research © 2012 Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research.
Bulletin of Economic Research
How to Cite
Kultti, K., Mauring, E., Vanhala, J. and Vesala, T. (2012), ADVERSE SELECTION IN DYNAMIC MATCHING MARKETS. Bulletin of Economic Research. doi: 10.1111/j.1467-8586.2012.00464.x
- Article first published online: 3 JUL 2012
- adverse selection;
- lemons principle;
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.