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Government interventions in a dynamic market with adverse selection

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  • Fuchs, William
  • Skrzypacz, Andrzej

Abstract

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.

Suggested Citation

  • Fuchs, William & Skrzypacz, Andrzej, 2015. "Government interventions in a dynamic market with adverse selection," Journal of Economic Theory, Elsevier, vol. 158(PA), pages 371-406.
  • Handle: RePEc:eee:jetheo:v:158:y:2015:i:pa:p:371-406 DOI: 10.1016/j.jet.2015.04.009
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Taneli Mäkinen & Francesco Palazzo, 2017. "The double bind of asymmetric information in over-the-counter markets," Temi di discussione (Economic working papers) 1128, Bank of Italy, Economic Research and International Relations Area.
    2. Fuchs, William & Öry, Aniko & Skrzypacz, Andrzej, 2016. "Transparency and distressed sales under asymmetric information," Theoretical Economics, Econometric Society.
    3. Palazzo, Francesco, 2017. "Search costs and the severity of adverse selection," Research in Economics, Elsevier, vol. 71(1), pages 171-197.
    4. Dirk Bergemann & Alessandro Bonatti & Alex Smolin, 2018. "The Design and Price of Information," American Economic Review, American Economic Association, pages 1-48.
    5. Braz Camargo & Kyungmin Kim & Benjamin Lester, 2016. "Information Spillovers, Gains from Trade, and Interventions in Frozen Markets," Review of Financial Studies, Society for Financial Studies, vol. 29(5), pages 1291-1329.
    6. Vincent Maurin, 2016. "Liquidity Fluctuations in Over the Counter Markets," 2016 Meeting Papers 218, Society for Economic Dynamics.

    More about this item

    Keywords

    Adverse selection; Market freeze; Optimal policy; Dynamics; Liquidity;

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G01 - Financial Economics - - General - - - Financial Crises

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