Dynamic adverse selection and the supply size

Abstract

In this paper we examine the problem of dynamic adverse selection in a stylized market where the quality of goods is a seller׳s private information while the realized distribution of qualities is public information. We obtain that full trade occurs in every dynamic competitive equilibrium. Moreover, we show that if prices can be conditioned on the supply size then a dynamic competitive equilibrium always exists, while it fails to exist if prices cannot be conditioned on the supply size and the frequency of exchanges is high enough. We conclude that the possibility to condition prices on the supply size allows us to reach efficiency in the limit for exchanges becoming more and more frequent, while otherwise the welfare loss due to delays of exchanges remains bounded away from zero.