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Trading Dynamics in Decentralized Markets with Adverse Selection

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  • Ben Lester

    (University of Western Ontario)

  • Braz Camargo

    (University of Western Ontario)

Abstract

We study a dynamic, decentralized market environment with asymmetric information and interdependent values between buyers and sellers, and characterize the complete set of equilibria. The model delivers a stark relationship between the severity of the information frictions and the time it takes for the market to clear, or market liquidity. We use this framework to understand how asymmetric information has contributed to the "frozen" credit market at the core of the current financial crisis, and to characterize optimal policy responses to this market failure.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 488.

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Date of creation: 2010
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Handle: RePEc:red:sed010:488

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References

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  1. Thomas Philippon & Vasiliki Skreta, 2010. "Optimal Interventions in Markets with Adverse Selection," NBER Working Papers 15785, National Bureau of Economic Research, Inc.
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  3. House, Christopher & Masatlioglu, Yusufcan, 2010. "Managing Markets for Toxic Assets," MPRA Paper 24590, University Library of Munich, Germany.
  4. Daniel R. Vincent, 1988. "Bargaining with Common Values," Discussion Papers 775, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Dino Gerardi & Johannes Horner & Lucas Maestri, 2010. "The Role of Commitment in Bilateral Trade," Cowles Foundation Discussion Papers 1760, Cowles Foundation for Research in Economics, Yale University.
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  9. Arvind Krishnamurthy, 2010. "How Debt Markets Have Malfunctioned in the Crisis," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 3-28, Winter.
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  23. Satterthwaite, Mark & Shneyerov, Art, 2004. "Dynamic Matching,Two-sided Incomplete Information, and Participation Costs: Existence and Convergence to Perfect Competition," Microeconomics.ca working papers shneyerov-04-12-17-02-54-, Vancouver School of Economics, revised 17 Dec 2004.
  24. Ricardo Lagos & Guillaume Rocheteau, 2007. "Liquidity in asset markets with search frictions," Working Paper 0706, Federal Reserve Bank of Cleveland.
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Citations

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Cited by:
  1. Kyungmin Kim & Benjamin Lester & Braz Camargo, 2012. "Subsidizing Price Discovery," 2012 Meeting Papers 338, Society for Economic Dynamics.
  2. House, Christopher & Masatlioglu, Yusufcan, 2010. "Managing Markets for Toxic Assets," MPRA Paper 24590, University Library of Munich, Germany.
  3. Briana Chang, 2012. "Adverse Selection and Liquidity Distortion in Decentralized Markets," 2012 Meeting Papers 403, Society for Economic Dynamics.
  4. Shengxing Zhang, 2012. "Liquidity Misallocation in an Over-The-Counter Market," 2012 Meeting Papers 529, Society for Economic Dynamics.
  5. Francesc Dilme & Fei Li, 2012. "Dynamic Education Signaling with Dropout," PIER Working Paper Archive 12-023, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  6. Diego Moreno & John Wooders, 2012. "Dynamic markets for lemons : performance, liquidity, and policy intervention," Economics Working Papers we1226, Universidad Carlos III, Departamento de Economía.
  7. Dino Gerardi & Lucas Maestri, 2013. "Bargaining over a Divisible Good in the Market for Lemons," Carlo Alberto Notebooks 312, Collegio Carlo Alberto.
  8. Francesc Dilme & Fei Li:, 2012. "Dynamic Education Signaling with Dropout, Second Version," PIER Working Paper Archive 13-048, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 03 Sep 2013.
  9. Veronica Guerrieri & Robert Shimer, 2012. "Dynamic Adverse Selection: A Theory of Illiquidity, Fire Sales, and Flight to Quality," NBER Working Papers 17876, National Bureau of Economic Research, Inc.
  10. Lester, Benjamin, 2013. "Breaking the ice: government interventions in frozen markets," Business Review, Federal Reserve Bank of Philadelphia, issue Q4, pages 19-25.

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