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Unobservable investments, trade efficiency and search frictions

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  • Yujing Xu

    (Shenzhen Audencia Business School, Shenzhen University)

Abstract

Information structure can affect market efficiency by influencing participants' investment incentives. In this case, the entrants' type distribution and the market trade efficiency are both affected by the information structure, so they are jointly determined and correlated. In order to investigate the effects of asymmetric information, this paper uses a random search model of ex ante investments and trade efficiency, assuming that the amount of investment remains the investor's private information. We show that the ex-ante payoffs are equivalent to the equilibrium payoffs when investments are observable. In the unique steady state equilibrium, non-degenerate investment distribution and price distribution emerge simultaneously with ex ante identical agents. The investments motivated by unobservability fail to improve social welfare due to the mismatches caused by unobservability. Allocating positive bargaining power to investors alleviates the mismatch problem and improves social welfare.

Suggested Citation

  • Yujing Xu, 2022. "Unobservable investments, trade efficiency and search frictions," Post-Print hal-03848827, HAL.
    • Handle: RePEc:hal:journl:hal-03848827
    DOI: 10.1111/caje.12595
    Note: View the original document on HAL open archive server: https://audencia.hal.science/hal-03848827
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    References listed on IDEAS

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