Costs and Benefits of Dynamic Trading in a Lemons Market

Costs and Benefits of Dynamic Trading in a Lemons Market

By
William Fuchs, Andrzej Skrzypacz
Review of Economic Dynamics. July
2019, Vol. 33, Pages 105-127

We study a dynamic market with asymmetric information that creates the lemons problem. We compare efficiency of the market under different assumptions about the timing of trade. We identify positive and negative aspects of dynamic trading, describe the optimal market design under regularity conditions and show that continuous-time trading can always be improved upon if sellers are present at t = 0. Instead, continuous trading is optimal if sellers arrive stochastically over time.