Revisiting the Lemons Market

This paper extends the standard competitive adverse selection model by allowing for qualitatively different information structures of agents on the informed side of the market. Using the stylized framework of the market for used cars, we examine the welfare properties of equilibria under the assumption that a fraction of the sellers remains uninformed about a parameter which is relevant for his own transaction. The analysis suggests that market performance is in general nonmonotonic in the number of uninformed sellers. The extent to which the presence of less well informed sellers improves upon a situation where all sellers are perfectly informed is shown to depend crucially on (a) the potential gains from trade in the market and (b) the average quality of the sellers' information structure.