Markets with Within-Type Adverse Selection

Abstract

We study bilateral trade with a seller owning multiple units of a good, where each unit is of binary quality. The seller privately knows her “type”—defined by the number of lemons that she owns—and which units in her endowments are the lemons (“ within-type adverse selection”). We characterize the set of informationally constrained Pareto optimal allocations and show that every such allocation must involve a trade characterized by a threshold λ ∗, with types having less (more) than λ ∗ units of lemons selling only their lemons (selling their entire endowment). We provide conditions for a distribution shift that give Pareto-improving allocations. (JEL D82, D86, L15)