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Equilibrium In A Competitive Market With Heterogeneously Informed Traders

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  • Gale, Ian

Abstract

This paper models the adverse selection problem faced by a market maker trading with informed hedgers. When the market maker is able to quote arbitrary offer schedules there are instances of non-existence of a competitive equilibrium. When an equilibrium does exist, better-informed hedgers may impose a dissipative externality on the less well-informed. However, if the types of hedgers are sufficiently different, equilibrium will be the same as in the full information case.

Suggested Citation

  • Gale, Ian, 1986. "Equilibrium In A Competitive Market With Heterogeneously Informed Traders," SSRI Workshop Series 292677, University of Wisconsin-Madison, Social Systems Research Institute.
    • Handle: RePEc:ags:uwssri:292677
    DOI: 10.22004/ag.econ.292677
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