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Decentralized trading with private information

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  • Mikhail Golosov

    (MIT,)

  • Aleh Tsyvinski

    (Harvard)

  • Guido Lorenzoni

    (MIT)

Abstract

We characterize an environment in which agents have private information and trade in decentralized markets. First, we show that all the useful information is learned in the long run. Second, we show that agents with private information receive rents, and the value of information is positive. This is in contrast to the classic analysis of Grossman and Stiglitz (1980) who show that in centralized markets with private information, the value of information is zero. Finally, we show that equilibrium allocations are efficient in the long run. We also provide characterization of the connection of volume to prices of assets.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 391.

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Date of creation: 2008
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Handle: RePEc:red:sed008:391

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References

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  1. Drew Fudenberg & David K. Levine, 1996. "Consistency and Cautious Fictitious Play," Levine's Working Paper Archive 470, David K. Levine.
  2. Wolinsky, Asher, 1990. "Information Revelation in a Market with Pairwise Meetings," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 1-23, January.
  3. Darrell Duffie & Nicolae Gârleanu & Lasse Heje Pedersen, 2007. "Valuation in Over-the-Counter Markets," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 20(6), pages 1865-1900, November.
  4. Dimitri Vayanos & Pierre-Olivier Weill, 2007. "A search-based theory of the on-the-run phenomenon," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 24474, London School of Economics and Political Science, LSE Library.
  5. Paul Milgrom & Nancy L.Stokey, 1979. "Information, Trade, and Common Knowledge," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 377R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(2), pages 179-221, May.
  7. 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, Swiss Finance Institute 09-33, Swiss Finance Institute.
  8. Ricardo Lagos & Guillaume Rocheteau & Pierre-Olivier Weill, 2007. "Crashes and recoveries in illiquid markets," Working Paper, Federal Reserve Bank of Cleveland 0708, Federal Reserve Bank of Cleveland.
  9. Ricardo Lagos, 2005. "Asset Prices and Liquidity in an Exchange Economy," 2005 Meeting Papers, Society for Economic Dynamics 143, Society for Economic Dynamics.
  10. Darrell Duffie & Semyon Malamud & Gustavo Manso, 2009. "Information Percolation With Equilibrium Search Dynamics," Econometrica, Econometric Society, Econometric Society, vol. 77(5), pages 1513-1574, 09.
  11. Ricardo Lagos & Guillaume Rocheteau, 2007. "Liquidity in asset markets with search frictions," Working Paper, Federal Reserve Bank of Cleveland 0706, Federal Reserve Bank of Cleveland.
  12. Max Blouin & Roberto Serrano, 1998. "A Decentralized Market with Common Values Uncertainty: Non-Steady States," Working Papers, Brown University, Department of Economics 98-5, Brown University, Department of Economics, revised 10 Aug 1998.
  13. Manuel Amador & Pierre-Olivier Weill, 2008. "Learning from Prices: Public Communication and Welfare," NBER Working Papers 14255, National Bureau of Economic Research, Inc.
  14. Weill, Pierre-Olivier, 2008. "Liquidity premia in dynamic bargaining markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 140(1), pages 66-96, May.
  15. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2004. "Over-the-Counter Markets," NBER Working Papers 10816, National Bureau of Economic Research, Inc.
  16. Dimitri Vayanos, 1998. "Transaction costs and asset prices : a dynamic equilibrium model," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 451, London School of Economics and Political Science, LSE Library.
  17. Michael Ostrovsky, 2012. "Information Aggregation in Dynamic Markets With Strategic Traders," Econometrica, Econometric Society, Econometric Society, vol. 80(6), pages 2595-2647, November.
  18. Darrell Duffie & Gustavo Manso, 2007. "Information Percolation in Large Markets," American Economic Review, American Economic Association, American Economic Association, vol. 97(2), pages 203-209, May.
  19. Amador, Manuel & Weill, Pierre-Olivier, 2006. "Learning from Private and Public Observation of Other's Actions," MPRA Paper 109, University Library of Munich, Germany.
  20. Douglas Gale, 2010. "Limit theorems for markets with sequential bargaining," Levine's Working Paper Archive 621, David K. Levine.
  21. Guillaume Rocheteau, 2009. "A monetary approach to asset liquidity," Working Paper, Federal Reserve Bank of Cleveland 0901, Federal Reserve Bank of Cleveland.
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Cited by:
  1. Bruno Biais & Pierre-Olivier Weill, 2009. "Liquidity Shocks and Order Book Dynamics," NBER Working Papers 15009, National Bureau of Economic Research, Inc.
  2. Shino Takayama, 2013. "Price Manipulation, Dynamic Informed Trading and Tame Equilibria: Theory and Computation," Discussion Papers Series, School of Economics, University of Queensland, Australia 492, School of Economics, University of Queensland, Australia.
  3. Daron Acemoglu & Asuman E. Ozdaglar, 2010. "Opinion Dynamics and Learning in Social Networks," Levine's Working Paper Archive 661465000000000222, David K. Levine.
  4. Guillaume Rocheteau, 2009. "A monetary approach to asset liquidity," Working Paper, Federal Reserve Bank of Cleveland 0901, Federal Reserve Bank of Cleveland.
  5. 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, Swiss Finance Institute 09-33, Swiss Finance Institute.
  6. Darrell Duffie & Semyon Malamud & Gustavo Manso, 2011. "Information Percolation in Segmented Markets," NBER Working Papers 17295, National Bureau of Economic Research, Inc.
  7. Michael Ostrovsky, 2012. "Information Aggregation in Dynamic Markets With Strategic Traders," Econometrica, Econometric Society, Econometric Society, vol. 80(6), pages 2595-2647, November.
  8. Jean-Paul L'Huillier, 2013. "Consumers' Imperfect Information and Price Rigidities," 2013 Meeting Papers, Society for Economic Dynamics 65, Society for Economic Dynamics.

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