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How Optimism Leads to Price Discovery and Efficiency in a Dynamic Matching Market

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  • Majumdar, Dipjyoti
  • Shneyerov, Art
  • Xie, Huan

Abstract

Abstract We study a market search equilibrium with aggregate uncertainty, private information and heterogeneus beiefs. Traders initially start out optimistic and then update their beliefs based on their matching experience in the market, using the Bayes rule. It is shown that all separating equilibria converge to perfect competition in the limit as the time between matches tends to 0. We also establish existence of a separating equilibrium.

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Bibliographic Info

Paper provided by Vancouver School of Economics in its series Microeconomics.ca working papers with number artyom_shneyerov-2010-32.

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Length: 41 pages
Date of creation: 23 Oct 2010
Date of revision: 26 Oct 2010
Handle: RePEc:ubc:pmicro:artyom_shneyerov-2010-32

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Web page: http://www.economics.ubc.ca/

Related research

Keywords: Markets with search frictions; aggregate uncertainty; heterogeneous beliefs; optimism; bargaining; foundations of Walrasian equilibrium;

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  1. Shneyerov, Artyom & Wong, Adam Chi Leung, 2010. "Bilateral matching and bargaining with private information," Games and Economic Behavior, Elsevier, vol. 68(2), pages 748-762, March.
  2. Nir Dagan & Roberto Serrano & Oscar Volij, . "Comment on McLennan and Sonnenschein "Sequential Bargaining as a Non-Cooperative Foundation for Walrasian Equilibrium"," Economic theory and game theory 001, Oscar Volij.
  3. Artyom Shneyerov & Adam Chi Leung Won, 2008. "The Rate of Convergence to Perfect Competition of Matching and Bargaining Mechanisms," Discussion Papers 1467, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Max Blouin & Roberto Serrano, 1998. "A Decentralized Market with Common Values Uncertainty: Non-Steady States," Working Papers 98-5, Brown University, Department of Economics, revised 10 Aug 1998.
  5. Lauermann, Stephan, 2011. "Dynamic matching and bargaining games: A general approach," MPRA Paper 31717, University Library of Munich, Germany.
  6. Gale, Douglas M, 1986. "Bargaining and Competition Part II: Existence," Econometrica, Econometric Society, vol. 54(4), pages 807-18, July.
  7. Alp Atakan, 2007. "Competitive Equilibria in Decentralized Matching with Incomplete Information," 2007 Meeting Papers 213, Society for Economic Dynamics.
  8. Gale, Douglas M, 1986. "Bargaining and Competition Part I: Characterization," Econometrica, Econometric Society, vol. 54(4), pages 785-806, July.
  9. Mark Satterthwaite & Artyom Shneyerov, 2007. "Dynamic Matching, Two-Sided Incomplete Information, and Participation Costs: Existence and Convergence to Perfect Competition," Econometrica, Econometric Society, vol. 75(1), pages 155-200, 01.
  10. Gianni De Fraja & Jozsef Sakovics, 2001. "Walras Retrouve: Decentralized Trading Mechanisms and the Competitive Price," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 842-863, August.
  11. Wolfram Merzyn & Gabor Virag & Stephan Lauermann, 2010. "Aggregate uncertainty and learning in a search model," 2010 Meeting Papers 1235, Society for Economic Dynamics.
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