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Trading Dynamics in Decentralized Markets with Adverse Selection

  • Ben Lester

    (University of Western Ontario)

  • Braz Camargo

    (University of Western Ontario)

We study a dynamic, decentralized market environment with asymmetric information and interdependent values between buyers and sellers, and characterize the complete set of equilibria. The model delivers a stark relationship between the severity of the information frictions and the time it takes for the market to clear, or market liquidity. We use this framework to understand how asymmetric information has contributed to the "frozen" credit market at the core of the current financial crisis, and to characterize optimal policy responses to this market failure.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 488.

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Date of creation: 2010
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Handle: RePEc:red:sed010:488
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