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Government interventions in a dynamic market with adverse selection

Listed author(s):
  • Fuchs, William
  • Skrzypacz, Andrzej

We study government interventions in a dynamic market with asymmetric information. We show that restricting trading opportunities after an initial round of trade is always optimal. Under a sufficient condition it is optimal to subsidize trades only at time zero while imposing prohibitively high taxes afterwards. If interventions are required to generate a Pareto improvement over laissez-faire then trade is only restricted for a short amount of time. If additional sellers can arrive later, the optimal policy entails asset purchases and price controls. Subsidies can greatly enhance welfare but can be detrimental if provided with delay.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022053115000794
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 158 (2015)
Issue (Month): PA ()
Pages: 371-406

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Handle: RePEc:eee:jetheo:v:158:y:2015:i:pa:p:371-406
DOI: 10.1016/j.jet.2015.04.009
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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