Business Intelligence

Lemons And Money Markets

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Executive Summary

This paper identifies simple conditions for monotone comparative statics of a unique equilibrium in the Akerlof-Wilson model. Separate conditions apply to trade volume and price. Trade volume increases when supply becomes both stronger and more elastic. In contrast, price decreases when supply becomes both stronger and less elastic. An application to the interbank market suggests surprisingly specific measures to address elevated term rates and market breakdown. Competitive markets with asymmetric information, as described first by Akerlof (1970), have become a cornerstone of the literature on adverse selection. A population of sellers, privately informed about the quality of their respective endowment, meets a population of uninformed, but otherwise interested buyers.

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