Theories of Institutions
Wednesday, April 3, 2002

Maarten Janssen

University of Vienna

Maarten Janssen

Game Theory applied to Institutional Economics

Abstract

The standard model of adverse selection does not explain why buyers have higher valuations than sellers. When the car market endogenously determines who acts as a buyer or seller, then high valuation agents will buy new cars (and sell in the 2nd hand car market), whereas those with lower valuations buy 2nd hand cars. In this way, the adverse selection problem can be partially circumvented.