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Market Selection and Asymmetrick Information

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  • George J. Mailath
  • Alvaro Sandroni

Abstract

Do investors making complementary investments face the correct incentives, especially when they cannot contract with each other prior to their decisions? We present a two-sided matching model in which buyers and sellers make investments prior to matching. Once matched, buyer and seller bargain over the price, taking into account outside options. Efficient decisions can always be sustained in equilibrium. We characterize the inefficiencies that can arise in equilibrium, and show that equilibria will be constrained efficient. We also show that the degree of diversity in a large market has implications for the extent of any inefficiency.

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Bibliographic Info

Paper provided by University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences in its series CARESS Working Papres with number 00-07.

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Handle: RePEc:wop:pennca:00-07

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Cited by:
  1. Sciubba, E., 1999. "The Evolution of Portfolio Rules and the Capital Asset Pricing Model," Cambridge Working Papers in Economics 9909, Faculty of Economics, University of Cambridge.
  2. Scott Condie & Jayant Ganguli, 2012. "The Pricing Effects of Ambiguous Private Information," INET Research Notes 16, Institute for New Economic Thinking (INET).
  3. Luo, Guo Ying, 2012. "Conservative traders, natural selection and market efficiency," Journal of Economic Theory, Elsevier, vol. 147(1), pages 310-335.
  4. Blume, Lawrence & Easley, David, 2009. "The market organism: Long-run survival in markets with heterogeneous traders," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1023-1035, May.
  5. Hongjun Yan, 2008. "Natural Selection in Financial Markets: Does It Work?," Management Science, INFORMS, vol. 54(11), pages 1935-1950, November.

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