Adverse Selection and Liquidity Distortion in Decentralized Markets
This paper studies the competitive equilibrium outcome in decentralized asset markets when both search friction and adverse selection play roles. In a dynamic environment with heterogeneous sellers and buyers, I show how adverse selection leads to the downward distortion of equilibrium market liquidity. The model predicts a strong link between the market liquidity and the underlying uncertainty stemming from adverse selection and therefore provides an explanation for the existence of massive illiquidity. As our setup captures two important dimensions in the trading market, price and liquidity, it shows how price and liquidity are jointly determined as an equilibrium outcome and further sheds lights on market segmentation. The framework also allows for a richer analysis of how sorting pattern is determined in such an environment and how different market segmentation may arise when sellers' motives for sale are unknown to the market.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Yoonsoo Lee & Toshihiko Mukoyama, 2008.
"Entry, Exit, and Plant-Level Dynamics over the Business Cycle,"
08-17, Center for Economic Studies, U.S. Census Bureau.
- Toshihiko Mukoyama & Yoonsoo Lee, 2008. "Entry, Exit, and Plant-level Dynamics over the Business Cycle," 2008 Meeting Papers 454, Society for Economic Dynamics.
- Yoonsoo Lee & Toshihiko Mukoyama, 2008. "Entry, exit and plant-level dynamics over the business cycle," Working Paper 0718, Federal Reserve Bank of Cleveland.
- Gordon M Phillips & Vojislav Maksimovic, 1999.
"The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and are there Efficiency Gains?,"
99-12, Center for Economic Studies, U.S. Census Bureau.
- Vojislav Maksimovic, 2001. "The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Efficiency Gains?," Journal of Finance, American Finance Association, vol. 56(6), pages 2019-2065, December.
- Weill, Pierre-Olivier, 2008.
"Liquidity premia in dynamic bargaining markets,"
Journal of Economic Theory,
Elsevier, vol. 140(1), pages 66-96, May.
- Pierre-Olivier Weill, 2004. "Liquidity Premia in Dynamic Bargaining Markets," Econometric Society 2004 North American Winter Meetings 648, Econometric Society.
- Guillaume Rocheteau & Ricardo Lagos, 2008.
"Liquidity in asset markets with search frictions,"
0804, Federal Reserve Bank of Cleveland.
- Eisfeldt, Andrea L. & Rampini, Adriano A., 2006. "Capital reallocation and liquidity," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 369-399, April.
- Bachmann, Ruediger & Bayer, Christian, 2009.
"The cross-section of firms over the business cycle: new facts and a DSGE exploration,"
Discussion Paper Series 1: Economic Studies
2009,17, Deutsche Bundesbank, Research Centre.
- Ruediger Bachmann & Christian Bayer, 2009. "The Cross-section of Firms over the Business Cycle: New Facts and a DSGE Exploration," CESifo Working Paper Series 2810, CESifo Group Munich.
- Christian Bayer & Ruediger Bachmann, 2009. "The Cross-section of Firms over the Business Cycle: New Facts and a DSGE Exploration," 2009 Meeting Papers 866, Society for Economic Dynamics.
- Veronica Guerrieri & Robert Shimer & Randall Wright, 2010.
"Adverse Selection in Competitive Search Equilibrium,"
Econometric Society, vol. 78(6), pages 1823-1862, November.
- Veronica Guerrieri & Robert Shimer & Randall Wright, 2009. "Adverse Selection in Competitive Search Equilibrium," NBER Working Papers 14915, National Bureau of Economic Research, Inc.
- Robert Shimer & Randall Wright & Veronica Guerrieri, 2009. "Adverse Selection in Competitive Search Equilibrium," 2009 Meeting Papers 139, Society for Economic Dynamics.
- Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, vol. 98(2), pages 232-260, June.
- Milgrom, P. & Shannon, C., 1991.
"Monotone Comparative Statics,"
11, Stanford - Institute for Thoretical Economics.
- Nicholas Bloom, 2007.
"The Impact of Uncertainty Shocks,"
NBER Working Papers
13385, National Bureau of Economic Research, Inc.
- Jan Eeckhout & Philipp Kircher, 2008.
"Sorting and Decentralized Price Competition,"
PIER Working Paper Archive
08-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Moen, E.R., 1995.
"Competitive Search Equilibrium,"
37/1995, Oslo University, Department of Economics.
- Douglas Gale, 1996.
"Equilibria and Pareto optima of markets with adverse selection (*),"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 207-235.
- Gale, Douglas, 1996. "Equilibria and Pareto Optima of Markets with Adverse Selection," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 207-35, February.
- Douglas Gale, 1994. "Equilibria and Pareto Optima of Markets with Adverse Selection," Papers 0046, Boston University - Industry Studies Programme.
- Gavazza, Alessandro, 2010.
"The role of trading frictions in real asset markets,"
25781, University Library of Munich, Germany.
- Alessandro Gavazza, 2011. "The Role of Trading Frictions in Real Asset Markets," American Economic Review, American Economic Association, vol. 101(4), pages 1106-43, June.
- Dale T. Mortensen & Randall Wright, 2002. "Competitive Pricing and Efficiency in Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 1-20, February.
- Warusawitharana, Missaka, 2008. "Corporate asset purchases and sales: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 87(2), pages 471-497, February.
- Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2004.
NBER Working Papers
10816, National Bureau of Economic Research, Inc.
- Thorsten V. Koeppl & Jonathan Chiu, 2010. "Market Freeze and Recovery: Trading Dynamics under Optimal Intervention by a Market-Maker-of-Last-Resort," 2010 Meeting Papers 78, Society for Economic Dynamics.
- Douglas Gale, 1992. "A Walrasian Theory of Markets with Adverse Selection," Review of Economic Studies, Oxford University Press, vol. 59(2), pages 229-255.
When requesting a correction, please mention this item's handle: RePEc:red:sed011:157. 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: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.