Dynamic markets for lemons: Performance, liquidity, and policy intervention

Moreno, D; Wooders, J

Dynamic markets for lemons: Performance, liquidity, and policy intervention

Moreno, D

Wooders, J

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Publication Type:: Journal Article
Citation:: Theoretical Economics, 2016, 11 (2), pp. 601 - 639
Issue Date:: 2016-05-01

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Field	Value	Language
dc.contributor.author	Moreno, D https://orcid.org/0000-0001-6285-398X	en_US
dc.contributor.author	Wooders, J https://orcid.org/0000-0002-4206-7137	en_US
dc.date.issued	2016-05-01	en_US
dc.identifier.citation	Theoretical Economics, 2016, 11 (2), pp. 601 - 639	en_US
dc.identifier.issn	1933-6837	en_US
dc.identifier.uri	http://hdl.handle.net/10453/116846
dc.description.abstract	© 2016 The Econometric Society. We study nonstationary dynamic decentralized markets with adverse selection in which trade is bilateral and prices are determined by bargaining. Examples include labor markets, housing markets, and markets for financial assets. We characterize equilibrium, and identify the dynamics of transaction prices, trading patterns, and the average quality in the market. When the horizon is finite, the surplus in the unique equilibrium exceeds the competitive surplus; as traders become perfectly patient, the market becomes completely illiquid at all but the first and last dates, but the surplus remains above the competitive surplus. When the horizon is infinite, the surplus realized equals the static competitive surplus. We study policies aimed at improving market performance, and show that subsidies to low quality or to trades at a low price, taxes on high quality, restrictions on trading opportunities, or government purchases may raise the surplus. In contrast, interventions like the Public-Private Investment Program for Legacy Assets reduce the surplus when traders are patient.	en_US
dc.relation	http://purl.org/au-research/grants/arc/DP140103566
dc.relation.ispartof	Theoretical Economics	en_US
dc.relation.isbasedon	10.3982/TE1631	en_US
dc.subject.classification	Economic Theory	en_US
dc.title	Dynamic markets for lemons: Performance, liquidity, and policy intervention	en_US
dc.type	Journal Article
utslib.citation.volume	2	en_US
utslib.citation.volume	11	en_US
utslib.for	1401 Economic Theory	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Economics Discipline
utslib.copyright.status	open_access
pubs.issue	2	en_US
pubs.publication-status	Published	en_US
pubs.volume	11	en_US

Abstract:

© 2016 The Econometric Society. We study nonstationary dynamic decentralized markets with adverse selection in which trade is bilateral and prices are determined by bargaining. Examples include labor markets, housing markets, and markets for financial assets. We characterize equilibrium, and identify the dynamics of transaction prices, trading patterns, and the average quality in the market. When the horizon is finite, the surplus in the unique equilibrium exceeds the competitive surplus; as traders become perfectly patient, the market becomes completely illiquid at all but the first and last dates, but the surplus remains above the competitive surplus. When the horizon is infinite, the surplus realized equals the static competitive surplus. We study policies aimed at improving market performance, and show that subsidies to low quality or to trades at a low price, taxes on high quality, restrictions on trading opportunities, or government purchases may raise the surplus. In contrast, interventions like the Public-Private Investment Program for Legacy Assets reduce the surplus when traders are patient.

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http://hdl.handle.net/10453/116846