Equilibrium, Adverse Selection, and Statistical Distributions

This paper addresses the problem of multiple equilibria in markets with adverse selection. Akerlof (1970) identified an unique equilibrium of the total market failure under adverse selection. Posterioly, Wilson (1979, 1980) argued that the presence of adverse selection may lead to multiple equilibria. In particular, this paper extends the work of Rose (1993), who stated that the existence of multiple equilibria depends on the distribution of quality. Rose found that multiple equilibria are highly unlikely for most standard probability distributions. This work considers additional statistical distributions for quality. The simulation results suggest the existence of multiple equilibria when the quality follows a beta normal distribution.