Too much trade:the hidden problem of adverse selection
De Meza, David
; Reito, Francesco; and Reyniers, Diane J.
(2021)
Too much trade:the hidden problem of adverse selection
Journal of Public Economics, 204: 104551.
ISSN 0047-2727
; Reito, Francesco; and Reyniers, Diane J.
(2021)
Too much trade:the hidden problem of adverse selection
Journal of Public Economics, 204: 104551.
ISSN 0047-2727
Adverse selection famously leads to the crowding out of socially beneficial trades. We show that even more trades may be simultaneously crowded in. The reason is that, in the absence of complete unravelling, “lemons” fetch more under adverse selection. It is demonstrated how these “bad” trades occur in insurance, credit and used-car markets, and some policy implications are discussed.
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