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Information Spillovers, Gains from Trade, and Interventions in Frozen Markets

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  • Braz Camargo
  • Kyungmin Kim
  • Benjamin Lester

Abstract

We study government interventions in markets suffering from adverse selection. Importantly, asymmetric information prevents both the realization of gains from trade and the production of information that is valuable to other market participants. We find a fundamental tension in maximizing welfare: while some intervention is required to restore trading, too much intervention depletes trade of its informational content. We characterize the optimal policy that balances these two considerations, and explore how it depends on features of the environment. Our model can be used to study a program introduced in 2009 to restore information production in the market for legacy assets. Received February 19, 2014; accepted November 20, 2015 by Editor Itay Goldstein.

Suggested Citation

  • 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.
  • Handle: RePEc:oup:rfinst:v:29:y:2016:i:5:p:1291-1329.
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    Cited by:

    1. Huberto Ennis, 2016. "Interventions in markets with adverse selection: Implications for discount window stigma," 2016 Meeting Papers 1590, Society for Economic Dynamics.

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