Learning by Owning in a Lemons Market

127 Pages Posted: 20 Jun 2016 Last revised: 27 Jan 2021

See all articles by Jordan Martel

Jordan Martel

Indiana University Bloomington, Kelley School of Business

Kenneth S Mirkin

University of Edinburgh

Brian Waters

University of Colorado, Boulder

Date Written: November 1, 2020

Abstract

We study market dynamics when an owner learns over time about the quality of her asset. Since this information is private, the owner sells strategically to a less informed buyer following sufficient negative information. In response, market prices feature a "U-shape" and trading probabilities a "hump-shape" with respect to the length of ownership prior to sale. As the owner initially acquires greater private information, buyers suffer greater adverse selection, and prices fall accordingly. Eventually, the probability of an informed sale shrinks, and prices subsequently rebound. We provide evidence consistent with our model in the markets for residential real estate, venture capital investments, and construction equipment.

Keywords: Private learning, Experimentation, Dynamic markets, Adverse selection

JEL Classification: D82, D83, C73

Suggested Citation

Martel, Jordan and Mirkin, Kenneth S and Waters, Brian, Learning by Owning in a Lemons Market (November 1, 2020). Available at SSRN: https://ssrn.com/abstract=2798088 or http://dx.doi.org/10.2139/ssrn.2798088

Jordan Martel

Indiana University Bloomington, Kelley School of Business ( email )

1275 E 10th St
Hodge Hall
Bloomington, IN 47405
United States

HOME PAGE: http://www.jordanmartel.com

Kenneth S Mirkin

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

Brian Waters (Contact Author)

University of Colorado, Boulder ( email )

1070 Edinboro Drive
Boulder, CO 80309
United States
3034921703 (Phone)

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