Efficient sorting in a dynamic adverse-selection model

Igal Hendel, Alessandro Lizzeri, Marciano Siniscalchi

Research output: Contribution to journalArticlepeer-review

22 Scopus citations

Abstract

We discuss a class of markets for durable goods where efficiency (or approximate efficiency) is obtained despite the presence of information asymmetries. In the model, the number of times a good has changed hands (the vintage of the good) is an accurate signal of its quality, each consumer self-selects into obtaining the vintage that the social planner would have assigned to her, and consumers' equilibrium trading behaviour in secondary markets is not subject to adverse selection. We show that producers have the incentive to choose contracts that lead to the efficient allocation, and to supply the efficient output. We also provide a contrast between leasing contracts, resale contracts, and different kinds of rental contracts. Resale contracts do not lead to the efficient allocation. A specific kind of rental contract provides the appropriate incentives to consumers.

Original languageEnglish (US)
Pages (from-to)467-497
Number of pages31
JournalReview of Economic Studies
Volume72
Issue number2
DOIs
StatePublished - Apr 1 2005
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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