Reputation for quality and adverse selection

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)

Abstract

We analyze a dynamic market with a seller who can make a one-time investment that affects the returns of tradable assets. The potential buyers of the assets cannot observe the seller's investment prior to the trade or verify it in any way after the trade. The market faces two types of inefficiency: the ex-ante inefficiency, i.e., the seller's moral hazard problem, and the ex-post inefficiency, i.e., inefficient ex-post allocations due to the adverse selection problem. We analyze how the observability of information by future buyers, through which the seller builds a reputation, affects the two types of inefficiency as well as the interplay between them.

Original languageEnglish
Pages (from-to)47-59
Number of pages13
JournalEuropean Economic Review
Volume76
DOIs
Publication statusPublished - 2015 May 1
Externally publishedYes

Keywords

  • Adverse selection
  • Moral hazard

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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