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Subsidizing price discovery

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  • Braz Camargo
  • Kyungmin (Teddy) Kim
  • Benjamin Lester

Abstract

When markets freeze, not only are gains from trade left unrealized, but the process of information production through prices, or price discovery, is disrupted as well. Though this latter effect has received much less attention than the former, it constitutes an important source of inefficiency during times of crisis. We provide a formal model of price discovery and use it to study a government program designed explicitly to restore the process of information production in frozen markets. This program, which provided buyers with partial insurance against acquiring low-quality assets, reveals a fundamental trade-off for policymakers: while some insurance encourages buyers to bid for assets when they otherwise would not, thus promoting price discovery, too much insurance erodes the informational content of these bids, which hurts price discovery.

Suggested Citation

  • Braz Camargo & Kyungmin (Teddy) Kim & Benjamin Lester, 2013. "Subsidizing price discovery," Working Papers 13-20, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:13-20
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    References listed on IDEAS

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    Cited by:

    1. Farhi, Emmanuel & Tirole, Jean, 2015. "Liquid bundles," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 634-655.
    2. Lester, Benjamin, 2013. "Breaking the ice: government interventions in frozen markets," Business Review, Federal Reserve Bank of Philadelphia, issue Q4, pages 19-25.
    3. Berentsen, Aleksander & McBride, Michael & Rocheteau, Guillaume, 2017. "Limelight on dark markets: Theory and experimental evidence on liquidity and information," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 70-90.
    4. 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.
    5. Gaetano Gaballo & Ramon Marimon, 2016. "Breaking the Spell with Credit-Easing: Self-Confirming Credit Crises in Competitive Search Economies," NBER Working Papers 22006, National Bureau of Economic Research, Inc.

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