Revisiting the lemons market

This article extends the standard competitive adverse selection model by al lowing for qualitatively different information structures of agents on the informed side of the market. Using the stylized framework of the market fur used cars, we examine the welfare properties of equilibria under the assum ption that a fraction of the sellers remains uninformed about a parameter t hat is relevant for their own transaction. Whether market performance incre ases or decreases in the number of uninformed sellers is shown to depend on (1) the potential gains from trade in the market and (2) the average quali ty of the sellers' information structure.