We present a model of the market for a used durable in which agents face ...xed costs of adjustment, the magnitude of which depends on the degree of adverse selection in the secondary market. We ...nd that, unlike typical models, the sS bands in our model contract as the variance of the shock process increases. We also analyze a dynamic version of the model in which agents are allowed to make d...

This paper analyses information acquisition in ultimatum bargaining with common values. Because of an endogenous lemons problem the equilibriumpayoffs of the agents are non-monotonic in the information cost. The mere possibility of information acquisition can cause no trade although the agents maintain symmetric information in equilibrium and the gain from trade is common knowledge. The agent r...

This is evident, for example, when students: ▲ investigate the interactions of liquids and powders that result in chemical reactions (e.g., vinegar and baking soda) compared to interactions that do not (e.g., water and sugar). ▲ in order to demonstrate the transformation of chemical to electrical energy, construct electrical cells from objects, such as lemons or potatoes, using pennies and alum...

We analyze a dynamic version of the Akerlof±Wilson ``lemons'' market in a competitive durable good setting. There is a ®xed set of sellers with private information about the quality of their wares. The price mechanism sorts sellers of different qualities into different time periodsÐprices and average quality of goods traded increase over time. Goods of all qualities are traded in ®nite time. Ma...

Unlike the previous notes, the material here is perfectly standard and can be found in the usual textbooks: see, e.g., Fudenberg-Tirole. For the examples in these notes (except for the very last section), I draw heavily on Martin Osborne’s excellent recent text, An Introduction to Game Theory, Oxford University Press. Obviously, incomplete information games — in which one or more players are pr...

We document a basic characteristic of adverse selection in secondhand markets for durable goods: goods with higher observed quality may have more adverse selection and hence lower unobserved quality. We provide a simple theoretical model to demonstrate this result, which is a consequence of the interaction of sorting between drivers over observed quality and adverse selection over unobserved qu...

Akerlof’s (1970) classical paper demonstrated that adverse selection can eliminate markets. These findings by Akerlof gave rise to a proliferation of theoretical models on insurance with adverse selection. However, there exists no empirical test for the model of Akerlof in the context of insurance. In fact, it is not possible to observe a market a la Akerlof in a real context, since that market...

Most every day actions take place in domestic rooms that are specific for certain classes of actions. Contextual information derived from domestic settings may therefore influence the efficiency of action recognition. The present studies investigated whether action recognition is modulated by compatibility of the context an action is embedded in. To this end, subjects watched video clips of act...

We investigate the nature of market failure in a dynamic version of Akerlof (1970) where identical cohorts of a durable good enter the market over time. In the dynamic model, equilibria with qualitatively different properties emerge. Typically, in equilibria of the dynamic model, sellers with higher quality wait in order to sell and wait more than sellers of lower quality. Among other things, w...