Information Disclosure in Dynamic Lemon Market

Abstract

This paper studies the incentive of a long run seller to disclose past offers when trading with a sequence of short-run buyers. Compared with the models of mandatory disclosure or mandatory non-disclosure, there is a new set of equilibria generated by allowing flexibility in the disclosure option. In this new class of equilibria, the seller adopts a threshold rule in disclosure and only discloses rejected price offer above the threshold to the future buyers. In a two-period case I show that the welfare-maximizing equilibrium in the optional disclosure model could generate a strictly higher social surplus than any equilibria in models with mandatory restrictions on the disclosure policy. Mandatory disclosure or concealment of past offers may not be necessary for market information structure. Moreover, a policy maker can adopt non-disclosure policy for lower prices and voluntary (or mandatory) disclosure policy for higher prices to enhance trading efficiency.