Dynamic market for lemons with endogenous quality choice by the seller

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8 Citations (Scopus)


We analyze a dynamic market for lemons in which the quality of the good is endogenously determined by the seller. Potential buyers sequentially submit offers to one seller. The seller can make an investment that determines the quality of the item at the beginning of the game, which is unobservable to buyers. At the interim stage of the game, the information and payoff structures are the same as in the market for lemons. Our main result is that the possibility of trade does not create any efficiency gain if (i) the common discounting is low, and (ii) the static incentive constraints preclude the mutually agreeable ex-ante contract under which the trade happens with probability one. Our result does not depend on whether the offers by buyers are private or public.

Original languageEnglish
Pages (from-to)152-162
Number of pages11
JournalGames and Economic Behavior
Publication statusPublished - 2014 Mar
Externally publishedYes


  • Adverse selection
  • Bargaining
  • Delay
  • Moral hazard

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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