Decentralized Trade Mitigates the Lemons Problem Articles uri icon

publication date

  • May 2010

start page

  • 383

end page

  • 399


  • 2


  • 51

International Standard Serial Number (ISSN)

  • 0020-6598

Electronic International Standard Serial Number (EISSN)

  • 1468-2354


  • In markets with adverse selection, only low-quality units trade in the competitive equilibrium when the average quality of the good held by sellers is low. Under decentralized trade, however, both high and
    lowquality units trade, although with delay. Moreover, when frictions
    are small the surplus realized is greater than the (static) competitive
    surplus. Thus, decentralized trade mitigates the lemons problem.
    Remarkably, payoffs are competitive as frictions vanish, even though
    both high and low-quality units continue to trade and there is trade at
    several prices.