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Information Spillovers, Gains From Trade, And Interventions In Frozen Markets

Author

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  • Camargo, Braz

    (Sao Paulo School of Economics – FGV)

  • Kim, Kyungmin

    (University of Iowa)

  • Lester, Benjamin

    (Federal Reserve Bank of Philadelphia)

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

Suggested Citation

  • Camargo, Braz & Kim, Kyungmin & Lester, Benjamin, 2016. "Information Spillovers, Gains From Trade, And Interventions In Frozen Markets," Working Papers 16-28, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:16-28
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    References listed on IDEAS

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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.
    2. Verico, Kiki & Natanael, Yeremia, 2018. "Let’s talk about the Free Trade Agreement (FTA): The five ASEAN members highlighting Indonesia," MPRA Paper 87947, University Library of Munich, Germany.

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    Keywords

    Government Intervention; government policy;

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