Title: Competing Mechanisms in Markets for Lemons
We study the competitive equilibria in a decentralized market with adverse selection,
where uninformed buyers post general trading mechanisms and informed sellers
select one of them. We show that this has different, significant implications with respect
to the traditional approach, based on bilateral contracting between the parties:
in equilibrium all buyers post the same mechanism and low quality sellers receive priority
in any meeting with a buyer. Also, buyers make strictly higher profits with low
than with high type sellers. When adverse selection is severe, the equilibrium features
rationing and is constrained inefficient. Compared to the equilibrium with bilateral
contracting, the equilibrium with general mechanisms yields a higher surplus for most,
but not all, parameter specifications. Hence in some situations restricting the set of
available mechanisms is welfare improving.