Information asymmetry between sellers and buyers often prevents socially desirable trade. This article presents a new mechanism that mitigates the inefficiencies caused by information asymmetry. I consider decentralized markets under adverse selection and show that such markets can be endogenously segmented in a way that improves social welfare. Endogenous segmentation is driven by low-quality sellers' incentive to attract more buyers by separating from high-quality sellers. The mechanism helps us understand the roles of several real-world institutions, such as multiple marketplaces, costless advertisements, and nonbinding list prices.
ASJC Scopus subject areas
- Economics and Econometrics