Information Spillover in Multi-Good Adverse Selection

Abstract

This paper analyzes information spillover in a multi-good adverse selection model in which a privately informed seller trades two different goods in two different markets. Buyers learn the seller’s information from both the market they participate in and the trading outcomes in the other market. We identify a sufficient negative correlation condition under which information spillover reduces efficiency loss. We also discover a novel type of coordination friction that leads to multiple equilibria, which can be welfare-ranked by the number of initial no-trade periods. When the sufficient negative correlation condition fails, the efficiency loss is the same as in the case without information spillover. (JEL D82, D83, L15)