Adverse Selection with Competitive Inspection
Gary Biglaiser and James W. Friedman
We develop a model with heterogeneous buyers and sellers in which the sellers have private information about their goods' qualities. We show that efficient trading cannot occur without middlemen. Middlemen can provide two services: one is inspection, and the other is the sorting of buyers and sellers through the rationing of sellers and the provision of two different price schedules.
We develop a model with heterogeneous buyers and sellers in which the sellers have private information about their goods' qualities. We show that efficient trading cannot occur without middlemen. Middlemen can provide two services: one is inspection, and the other is the sorting of buyers and sellers through the rationing of sellers and the provision of two different price schedules.