Friday, April 22, 2011
Posted by D. Daniel Sokol
Keiichi Kawai (Department of Economics, Northwestern University) explores the Dynamic Market for Lemons with Endogenous Quality Choice by the Seller.
ABSTRACT: 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.