Adverse selection What if there is more than two types of cars? Suppose that car quality is uniformly distributed between $1000 and $2000 any car that a seller values at Sx is valued by a buyer at $(x+ 300) Which cars will be traded?
Adverse Selection What if there is more than two types of cars? Suppose that car quality is uniformly distributed between $1000 and $2000 any car that a seller values at $x is valued by a buyer at $(x+300). Which cars will be traded?
Adverse selection 1000 2000 Seller values
Adverse Selection Seller values 1000 2000
Adverse selection 1000 1500 2000 Seller values
Adverse Selection 1000 1500 2000 Seller values
Adverse selection The expected value of any car to a buyer is $1500+$300=$1800. 1000 1500 2000 Seller values
Adverse Selection 1000 1500 2000 The expected value of any car to a buyer is $1500 + $300 = $1800. Seller values
Adverse selection The expected value of any car to a buyer is $1500+$300=$1800. 1000 1500 2000 Seller values So sellers who value their cars at more than $1800 exit the market
Adverse Selection 1000 1500 2000 The expected value of any car to a buyer is $1500 + $300 = $1800. So sellers who value their cars at more than $1800 exit the market. Seller values