IDEAS home Printed from https://ideas.repec.org/p/nwu/cmsems/1513.html
   My bibliography  Save this paper

Adverse Selection and Liquidity Distortion in Decentralized Markets

Author

Listed:
  • Briana Chang

Abstract

Why do some markets remain liquid even when there is a positive gain from trade? In order to understand the real determinants of market liquidity in decentralized markets, we are going to analyze this question in a competitive market setting when both search frictions and adverse selection play roles. In a dynamic environment with heterogeneous sellers and buyers, we investigate the role of market frictions and how adverse selection leads to the distortion of equilibrium market liquidity. The resulting friction therefore prohibits resources from reallocating efficiently. In the application of capital reallocation, we further show that this trading friction can generate significant economic fluctuations.

Suggested Citation

  • Briana Chang, 2011. "Adverse Selection and Liquidity Distortion in Decentralized Markets," Discussion Papers 1513, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1513
    as

    Download full text from publisher

    File URL: http://www.kellogg.northwestern.edu/research/math/papers/1513.pdf
    File Function: main text
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Veronica Guerrieri & Robert Shimer, 2014. "Dynamic Adverse Selection: A Theory of Illiquidity, Fire Sales, and Flight to Quality," American Economic Review, American Economic Association, vol. 104(7), pages 1875-1908, July.
    2. Shao, Enchuan, 2014. "The threat of counterfeiting in competitive search equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 168-185.
    3. Michael J. Fishman & Jonathan A. Parker, 2015. "Valuation, Adverse Selection, and Market Collapses," Review of Financial Studies, Society for Financial Studies, vol. 28(9), pages 2575-2607.
    4. Halket, Jonathan R & Pignatti, Matteo, 2012. "Housing tenure choices with private information," Economics Discussion Papers 8961, University of Essex, Department of Economics.
    5. Shengxing Zhang, 2012. "Liquidity Misallocation in an Over-The-Counter Market," 2012 Meeting Papers 529, Society for Economic Dynamics.
    6. repec:eee:jetheo:v:174:y:2018:i:c:p:16-56 is not listed on IDEAS
    7. Halket, Jonathan & Pignatti Morano di Custoza, Matteo, 2015. "Homeownership and the scarcity of rentals," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 107-123.

    More about this item

    Keywords

    Liquidity; Search frictions; Adverse selection; Uncertainty; Capital Reallocation JEL Classification Numbers: D82; G1;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G1 - Financial Economics - - General Financial Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nwu:cmsems:1513. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fran Walker). General contact details of provider: http://edirc.repec.org/data/cmnwuus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.