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Trading Dynamics in Decentralized Markets with Adverse Selection

Author

Listed:
  • Ben Lester

    (University of Western Ontario)

  • Braz Camargo

    (University of Western Ontario)

Abstract

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.

Suggested Citation

  • Ben Lester & Braz Camargo, 2010. "Trading Dynamics in Decentralized Markets with Adverse Selection," 2010 Meeting Papers 488, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:488
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G1 - Financial Economics - - General Financial Markets

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