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Limelight on dark markets: an experimental study of liquidity and information

  • Aleksander Berentsen
  • Michael McBride
  • Guillaume Rocheteau

The goal of this paper is to study how informational frictions affect asset liquidity in OTC markets in a laboratory setting. The experiments replicate an OTC market similar to the one used in monetary and financial economics (Shi, 1995; Trejos and Wright, 1995; Duffie, Garleanu, and Pedersen, 2005): individuals are matched bilaterally and at random, there are gains from trades due to differences in technologies and endowments, and the terms of trade are determined through a simple bargaining protocol. Subjects buy commodities that have different private values with assets that have common values and can be subject to a private information problem. The asset plays the role of a medium of exchange, but this role can be affected by its lack of "recognizability." We study a benchmark experiment where the OTC bargaining game takes place under complete information, a set of experiments with adverse selection where the terminal value of notes are determined exogenously, and a set of experiments with hidden actions where subjects can produce fraudulent notes at some cost.

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Paper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 126.

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Date of creation: Jun 2013
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Handle: RePEc:zur:econwp:126
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