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Imperfect information transmission and adverse selection in asset markets

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  • Choi, Michael

Abstract

This paper studies asset markets where owners of assets do not inherit private information from previous owners after a transaction and must learn about asset quality over time. Instantaneous learning by owners maximizes the number of owners with private information, but also maximizes the trading volume and welfare. This result is contrary to the traditional view that information asymmetry hurts trade efficiency. Public disclosure of information is not always optimal and its welfare implication depends crucially on the source of gains from trade.

Suggested Citation

  • Choi, Michael, 2018. "Imperfect information transmission and adverse selection in asset markets," Journal of Economic Theory, Elsevier, vol. 176(C), pages 619-649.
  • Handle: RePEc:eee:jetheo:v:176:y:2018:i:c:p:619-649
    DOI: 10.1016/j.jet.2018.04.007
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    References listed on IDEAS

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    More about this item

    Keywords

    Adverse selection; Information transmission; Learning;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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