Adverse selection Suppose EV<$2000 a peach seller cannot negotiate a price above $2000 and will exit the market So all buyers know that remaining sellers own lemons only Buyers will pay at most $1200 and only lemons are sold
Adverse Selection Suppose EV < $2000. A peach seller cannot negotiate a price above $2000 and will exit the market. So all buyers know that remaining sellers own lemons only. Buyers will pay at most $1200 and only lemons are sold
Adverse selection Hence“ too many” lemons“ crowd out 'the peaches from the market. Gains-to-trade are reduced since no peaches are traded The presence of the lemons inflicts an external cost on buyers and peach owners
Adverse Selection Hence “too many” lemons “crowd out” the peaches from the market. Gains-to-trade are reduced since no peaches are traded. The presence of the lemons inflicts an external cost on buyers and peach owners
Adverse selection How many lemons can be in the market without crowding out the peaches? Buyers will pay $2000 for a car only if E=S1200(-q)+S2400q≥S2000
Adverse Selection How many lemons can be in the market without crowding out the peaches? Buyers will pay $2000 for a car only if EV = $1200(1− q) + $2400q $2000
Adverse selection How many lemons can be in the market without crowding out the peaches? Buyers will pay $2000 for a car only if EV=S1200(-q)+$2400q≥S2000 q 3 So if over one-third of all cars are lemons, then only lemons are traded
Adverse Selection How many lemons can be in the market without crowding out the peaches? Buyers will pay $2000 for a car only if So if over one-third of all cars are lemons, then only lemons are traded. . 3 2 $1200(1 ) $2400 $2000 = − + q EV q q
Adverse selection A market equilibrium in which both types of cars are traded and cannot be distinguished by the buyers is a pooling equilibrium(混同均衡). A market equilibrium in which only one of the two types of cars is traded or both are traded but can be distinguished by the buyers, is a separating equilibrium(分离均衡
Adverse Selection A market equilibrium in which both types of cars are traded and cannot be distinguished by the buyers is a pooling equilibrium (混同均衡). A market equilibrium in which only one of the two types of cars is traded, or both are traded but can be distinguished by the buyers, is a separating equilibrium (分离均衡)