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Decentralized trading with private information

  • Mikhail Golosov

    (MIT,)

  • Aleh Tsyvinski

    (Harvard)

  • Guido Lorenzoni

    (MIT)

We characterize an environment in which agents have private information and trade in decentralized markets. First, we show that all the useful information is learned in the long run. Second, we show that agents with private information receive rents, and the value of information is positive. This is in contrast to the classic analysis of Grossman and Stiglitz (1980) who show that in centralized markets with private information, the value of information is zero. Finally, we show that equilibrium allocations are efficient in the long run. We also provide characterization of the connection of volume to prices of assets.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 391.

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Date of creation: 2008
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Handle: RePEc:red:sed008:391
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Web page: http://www.EconomicDynamics.org/society.htm
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  1. Fudenberg, Drew & Levine, David K., 1995. "Consistency and cautious fictitious play," Journal of Economic Dynamics and Control, Elsevier, vol. 19(5-7), pages 1065-1089.
  2. Ricardo Lagos, 2005. "Asset Prices and Liquidity in an Exchange Economy," 2005 Meeting Papers 143, Society for Economic Dynamics.
  3. Ricardo Lagos & Guillaume Rocheteau & Pierre-Olivier Weill, 2007. "Crashes and recoveries in illiquid markets," Working Paper 0708, Federal Reserve Bank of Cleveland.
  4. Pierre-Olivier Weill & Dimitri Vayanos, 2007. "A Search-Based Theory of the On-the-Run Phenomenon," FMG Discussion Papers dp577, Financial Markets Group.
  5. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May.
  6. Guillaume Rocheteau & Ricardo Lagos, 2008. "Liquidity in asset markets with search frictions," Working Paper 0804, Federal Reserve Bank of Cleveland.
  7. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2006. "Valuation in Over-the-Counter Markets," NBER Working Papers 12020, National Bureau of Economic Research, Inc.
  8. Manuel Amador & Pierre Olivier Weill, 2008. "Learning from Prices: Public Communication and Welfare," 2008 Meeting Papers 390, Society for Economic Dynamics.
  9. Darrell DUFFIE & Semyon MALAMUD & Gustavo MANSO, . "Information Percolation with Equilibrium Search Dynamics," Swiss Finance Institute Research Paper Series 09-02, Swiss Finance Institute.
  10. Weill, Pierre-Olivier, 2008. "Liquidity premia in dynamic bargaining markets," Journal of Economic Theory, Elsevier, vol. 140(1), pages 66-96, May.
  11. Max Blouin & Roberto Serrano, 1998. "A Decentralized Market with Common Values Uncertainty: Non-Steady States," Working Papers 98-5, Brown University, Department of Economics, revised 10 Aug 1998.
  12. Dimitri Vayanos, 1998. "Transaction costs and asset prices : a dynamic equilibrium model," LSE Research Online Documents on Economics 451, London School of Economics and Political Science, LSE Library.
  13. Michael Ostrovsky, 2012. "Information Aggregation in Dynamic Markets With Strategic Traders," Econometrica, Econometric Society, vol. 80(6), pages 2595-2647, November.
  14. Duffie, Darrell & Malamud, Semyon & Manso, Gustavo, 2010. "The relative contributions of private information sharing and public information releases to information aggregation," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1574-1601, July.
  15. Wolinsky, Asher, 1987. "Information Revelation in a Market with Pairwise Meetings," The Warwick Economics Research Paper Series (TWERPS) 284, University of Warwick, Department of Economics.
  16. Guillaume Rocheteau, 2009. "A monetary approach to asset liquidity," Working Paper 0901, Federal Reserve Bank of Cleveland.
  17. Paul Milgrom & Nancy L.Stokey, 1979. "Information, Trade, and Common Knowledge," Discussion Papers 377R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  18. repec:cup:cbooks:9780521643306 is not listed on IDEAS
  19. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2004. "Over-the-Counter Markets," NBER Working Papers 10816, National Bureau of Economic Research, Inc.
  20. Darrell Duffie & Gustavo Manso, 2007. "Information Percolation in Large Markets," American Economic Review, American Economic Association, vol. 97(2), pages 203-209, May.
  21. Amador, Manuel & Weill, Pierre-Olivier, 2006. "Learning from Private and Public Observation of Other's Actions," MPRA Paper 109, University Library of Munich, Germany.
  22. Gale, Douglas, 1987. "Limit theorems for markets with sequential bargaining," Journal of Economic Theory, Elsevier, vol. 43(1), pages 20-54, October.
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