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http://hdl.handle.net/10419/56233
  
Title:Prices and quality signals PDF Logo
Authors:Voorneveld, Mark
Weibull, Jörgen W.
Issue Date:2004
Series/Report no.:SSE/EFI Working Paper Series in Economics and Finance 551
Abstract:We consider a market-for-lemons model where the seller is a price setter, and, in addition to observing the price, the buyer receives a private noisy signal of the product's quality, such as when a prospective buyer looks at a car or house for sale, or when an employer interviews a job candidate. Sufficient conditions are given for the existence of perfect Bayesian equilibria, and we analyze equilibrium prices, trading probabilities and gains of trade. In particular, we identify separating equilibria with partial and full adverse selection as well as pooling equilibria. We also study the role of the buyer's signal precision, from being completely uninformative (as in standard adverse-selection models) to being completely informative (as under symmetric information). The robustness of results for these two boundary cases is analyzed, and comparisons are made with established models of monopoly and perfect competition.
Subjects:lemons
noisy quality signal
adverse selection
JEL:C72
D82
Document Type:Working Paper
Appears in Collections:SSE/EFI Working Paper Series in Economics and Finance, EFI - The Economic Research Institute, Stockholm School of Economics

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