Trading dynamics with private buyer signals in the market for lemons

Ayça Kaya, Kyungmin Kim

Research output: Contribution to journalArticlepeer-review

10 Scopus citations


We present a dynamic model of trading under adverse selection in which a seller sequentially meets buyers, each of whom receives a noisy signal about the quality of the seller's asset and offers a price. We fully characterize the equilibrium trading dynamics and show that buyers' beliefs about the quality of the asset can either increase or decrease over time, depending on the initial level. This result demonstrates how the introduction of private buyer signals enriches the set of trading patterns that can be accommodated within the framework of dynamic adverse selection, thereby broadening its applicability.We also examine the economic effects of search frictions and the informativeness of buyers' signals in our model and discuss the robustness of our main insights in multiple directions.

Original languageEnglish (US)
Pages (from-to)2318-2352
Number of pages35
JournalReview of Economic Studies
Issue number4
StatePublished - Oct 1 2018


  • Adverse selection
  • Inspection
  • Market for lemons
  • Time-on-the-market

ASJC Scopus subject areas

  • Economics and Econometrics


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