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Information percolation in segmented markets

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  • Duffie, Darrell
  • Malamud, Semyon
  • Manso, Gustavo

Abstract

We study equilibria of dynamic over-the-counter markets in which agents are distinguished by their preferences and information. Over time, agents are privately informed by bids and offers. Investors differ with respect to information quality, including initial information precision, and also in terms of market “connectivity,” the expected frequency of their bilateral trading opportunities. We characterize endogenous information acquisition and show how learning externalities affect information gathering incentives. More “liquid” markets lead to higher equilibrium information acquisition when the gains from trade and market duration are sufficiently large. On the other hand, for a small market duration, the opposite may occur if agents vary sufficiently in terms of their market connectivity.

Suggested Citation

  • Duffie, Darrell & Malamud, Semyon & Manso, Gustavo, 2014. "Information percolation in segmented markets," Journal of Economic Theory, Elsevier, vol. 153(C), pages 1-32.
    • Handle: RePEc:eee:jetheo:v:153:y:2014:i:c:p:1-32
    DOI: 10.1016/j.jet.2014.05.006
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    More about this item

    Keywords

    Over-the-counter markets; Information transmission; Learning; Search;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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