Too much trade: the hidden problem of adverse selection
De Meza, D.
, Reito, F. & Reyniers, D. J.
(2021).
Too much trade: the hidden problem of adverse selection.
Journal of Public Economics,
204,
https://doi.org/10.1016/j.jpubeco.2021.104551
, Reito, F. & Reyniers, D. J.
(2021).
Too much trade: the hidden problem of adverse selection.
Journal of Public Economics,
204,
https://doi.org/10.1016/j.jpubeco.2021.104551
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.
