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Information Percolation in Segmented Markets

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  • Darrell Duffie
  • Semyon Malamud
  • Gustavo Manso

Abstract

We calculate equilibria of dynamic double-auction markets in which agents are distinguished by their preferences and information. Over time, agents are privately informed by bids and offers. Investors are segmented into groups that differ with respect to characteristics determining information quality, including initial information precision as well as market “connectivity,” the expected frequency of their trading opportunities. Investors with superior information sources attain strictly higher expected profits, provided their counterparties are unable to observe the quality of those sources. If, however, the quality of bidders’ information sources are commonly observable, then, under conditions, investors with superior information sources have strictly lower expected profits.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17295.

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Date of creation: Aug 2011
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Handle: RePEc:nbr:nberwo:17295

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  1. Darrell DUFFIE & Semyon MALAMUD & Gustavo MANSO, 2010. "Information Percolation in Segmented Markets," Swiss Finance Institute Research Paper Series 10-09, Swiss Finance Institute.
  2. Darrell DUFFIE & Semyon MALAMUD & Gustavo MANSO, . "The Relative Contributions of Private Information Sharing and Public Information Releases to Information Aggregation," Swiss Finance Institute Research Paper Series 09-33, Swiss Finance Institute.
  3. Satterthwaite, Mark A. & Williams, Steven R., 1989. "Bilateral trade with the sealed bid k-double auction: Existence and efficiency," Journal of Economic Theory, Elsevier, vol. 48(1), pages 107-133, June.
  4. Darrell DUFFIE & Semyon MALAMUD & Gustavo MANSO, . "Information Percolation with Equilibrium Search Dynamics," Swiss Finance Institute Research Paper Series 09-02, Swiss Finance Institute.
  5. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
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  9. Gustavo Manso & Gaston Giroux & Darrell Duffie, 2008. "Information Percolation," 2008 Meeting Papers 471, Society for Economic Dynamics.
  10. Gale, Douglas & Kariv, Shachar, 2003. "Bayesian learning in social networks," Games and Economic Behavior, Elsevier, vol. 45(2), pages 329-346, November.
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  13. Wolfgang Pesendorfer & Jeroen M. Swinkels, 1997. "The Loser's Curse and Information Aggregation in Common Value Auctions," Econometrica, Econometric Society, vol. 65(6), pages 1247-1282, November.
  14. Peter M. Demarzo & Dimitri Vayanos & Jeffrey Zwiebel, 2003. "Persuasion Bias, Social Influence, And Unidimensional Opinions," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 909-968, August.
  15. Banerjee, Abhijit & Fudenberg, Drew, 2004. "Word-of-mouth learning," Games and Economic Behavior, Elsevier, vol. 46(1), pages 1-22, January.
  16. Paul Milgrom & Nancy L.Stokey, 1979. "Information, Trade, and Common Knowledge," Discussion Papers 377R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  17. Sun, Yeneng, 2006. "The exact law of large numbers via Fubini extension and characterization of insurable risks," Journal of Economic Theory, Elsevier, vol. 126(1), pages 31-69, January.
  18. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  19. Darrell Duffie & Gustavo Manso, 2007. "Information Percolation in Large Markets," American Economic Review, American Economic Association, vol. 97(2), pages 203-209, May.
  20. Kadan, Ohad, 2007. "Equilibrium in the two-player, k-double auction with affiliated private values," Journal of Economic Theory, Elsevier, vol. 135(1), pages 495-513, July.
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Cited by:
  1. Darrell DUFFIE & Semyon MALAMUD & Gustavo MANSO, 2010. "Information Percolation in Segmented Markets," Swiss Finance Institute Research Paper Series 10-09, Swiss Finance Institute.
  2. Rosenthal, Dale W.R. & Thomas, Nordia Diana Marie, 2012. "Transact taxes in a price maker/taker market," MPRA Paper 40556, University Library of Munich, Germany.
  3. Semyon Malamud & Marzena Rostek, 2012. "Decentralized Exchange," Working Papers 12-18, NET Institute.

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