This paper demonstrates that adverse selection can cause the coexistence of involuntary unemployment and involuntary vacancy in a dynamic decentralized trading model, even without search friction. Our model is built on a simple version of Mortensen and Pissarides (1994) with three important changes. First, a seller has private information about the quality of the goods to be traded, while a buy...

This key tension in this set of topics centers around the role of commitment in longterm contracting. Previously, we assumed full commitment power on the part of the Principal in setting all aspects of a contract. In a dynamic setting, the ful…llment of the early stages of a contract provides information to the Principal about the agent’s type. Naturally, the Principal will be tempted to act on...

Do Walrasian markets function orderly in the presence of adverse selection? In particular, Is their outcome efficient when exclusive contracts are enforceable? This paper addresses these questions in the context of a Rothschild and Stiglitz insurance economy. We identify an externality associated with the presence of adverse selection as a special form of consumption externality. Consequently, ...

The single-crossing assumption simplifies the analysis of screening models as local incentive compatibility becomes sufficient for global incentive compatibility. If single crossing is violated, global incentive compatibility constraints have to be taken into account. This paper studies monotone solutions in a screening model that allows a one-time violation of single crossing. The results show...

This paper characterizes the optimal contract offered by an uninformed principal to an informed agent when the latter's reservation utility depends on his type. The informational rent is nonmonotonic so that interior types may have a vanishing rent or be excluded from trade. The paper identifies conditions for the optimal contract to be separating, to be nonstochastic, and to induce full partic...

We study how seller exit and continuing sellers’ behavior on eBay are affected by an improvement in market transparency. The improvement was achieved by reducing strategic bias in buyer ratings. It led to a significant increase in buyer satisfaction with seller performance, but not to an increase in seller exit. When sellers had the choice between exiting—a reduction in adverse selection—and im...

I analyze a market with asymmetric information, interdependent values, multiple trading opportunities and trade frictions. The frictions can be reduced at a cost, e.g. by increasing attention, search or computing power. Raising the difference between the values of buyers and sellers can delay trade, despite the greater gains from trade. Rejecting an initial offer is a stronger signal when the o...

We develop a macroeconomic model with adverse selection. A continuum of households purchase goods from a continuum of anonymous producers. The quality of products can only be learned after trade. Adverse selection arises as low-quality goods deliver higher profits for producers but are less desirable for households. Higher aggregate demand induces more high-quality goods, raises average quality...

Valuation has an externality: it creates information on which adverse selection can occur. We study a market in which investors (or lenders) buy uncertain future cash flows that are ex ante identical but ex post heterogeneous across assets from sellers (or borrowers) with reservation values. There exists a limited amount of a costly technology that can be purchased before the market opens that ...

A significant and growing share of US agricultural output is produced under a production or marketing contract. An important controversy regarding agricultural production contracts is the control of non-labor inputs. Over time, contracts have tended to place more inputs under the buyer’s control and fewer under the farmer’s. This analysis examines the welfare effects of this trend. In the frame...