We investigate the nature of the adverse selection problem in a market for a durable good where trading and entry of new buyers and sellers takes place in continuous time. In the continuous time model equilibria with properties that are qualitatively different from the static equilibria, emerge. Typically, in equilibria of the continuous time model sellers with higher quality wait in order to sell and wait more than sellers of lower quality do. Among other things, we show that for any distribution of quality there exist an infinite number of cyclical equilibria where all goods are traded within a finite time after entering the market. This holds true even if the good is not perfectly durable or when buyers are not risk-neutral.

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Tinbergen Institute Discussion Paper Series
Tinbergen Institute

Janssen, M., & Karamychev, V. (2000). Continuous Time Trading in Markets with Adverse Selection (No. TI 00-109/1). Tinbergen Institute Discussion Paper Series. Retrieved from http://hdl.handle.net/1765/6928