The Role of Memory in Lemons Markets

Abstract:

Information is often recorded and stored independently of the will of the parties it relates to, and then made available to third parties. Law enforcement agencies, credit registers, Google and Facebook, for example, keep substantial amount of information about individuals’ past. Typically, part of the information is erased from the public records with time, that is, becomes forgotten. Should information be forgotten, and if yes, how fast? And should good past information be forgotten faster than bad, as in many legal systems, or the other way around? We answer these questions in a dynamic model of markets with adverse selection. We show that in these markets it is typically optimal to keep negative records for a long time, while positive records should be forgotten rapidly to avoid market breakdown.