Asymmetric Information, Adverse Selection and Online Disclosure: The Case of eBay Motors

Abstract

Since Akerlof (1970), economists have understood the adverse selection problem that information asymmetries can create in used goods markets. The remarkable growth in online auctions of used goods, where buyers generally purchase sight unseen, therefore poses a puzzle. I argue that part of the solution is that sellers voluntarily disclose their private information to buyers through photos, text and graphics on the auction webpage. In so doing they define a precise contract between buyer and seller — to deliver the car shown — and this helps protect the buyer from adverse selection. Extending previous theoretical work by Jovanovic (1982), I model the impact of contractible disclosure and changes in disclosure costs on performance and adverse selection on online auction platforms. To test this theory, I examine data from eBay Motors. I find first that sellers selectively disclose information; second that this reduces information asymmetry; and finally that disclosure costs impact both the level of disclosure and the prices obtained by sellers, and consequently incentives for seller participation.