Working Paper No. 11-36 Trading Dynamics in Decentralized Markets with Adverse Selection
نویسندگان
چکیده
We study a dynamic, decentralized lemons market with one–time entry and characterize its set of non–stationary equilibria. This framework offers a theory of how a market suffering from adverse selection recovers over time endogenously; given an initial fraction of lemons, the model provides sharp predictions about how prices and the composition of assets evolve over time. Comparing economies in which the initial fraction of lemons varies, we study the relationship between the severity of the lemons problem and market liquidity. We use this framework to understand how asymmetric information contributed to the breakdown in trade of asset–backed securities during the recent financial crisis, and to evaluate the efficacy of one policy that was implemented in attempt to restore liquidity.
منابع مشابه
Trading dynamics in decentralized markets with adverse selection
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 info...
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