MICRO/THEORY: The Market for Lemons under Regularity; Professor Angel HERNANDO-VECIANA (University Charles III of Madrid)

Abstract

In this paper, we conduct an investigation of a competitive version of the market for lemons using the tools of mechanism design. Our main contribution is two fold. First, we provide regularity conditions under which the constraint efficient (i.e.~second best) is particularly simple. It can be implemented either with a competitive equilibrium or a regulated price with uniform rationing. We also investigate optimal subsidies and quantity withdrawals and discuss the role of screening. Second, we introduce new techniques based on generalisations of mean preserving spreads/concentrations that are essential to derive our regularity conditions and that apply more generally to mechanism design problems.