Decentralized Trading with Private Information

80 Pages Posted: 17 Nov 2009 Last revised: 22 May 2023

See all articles by Mikhail Golosov

Mikhail Golosov

Princeton University - Department of Economics

Guido Lorenzoni

Northwestern University; National Bureau of Economic Research (NBER)

Aleh Tsyvinski

Yale University - Cowles Foundation; Yale University

Date Written: November 2009

Abstract

The paper studies asset pricing in informationally decentralized markets. These markets have two key frictions: trading is decentralized (bilateral), and some agents have private information. We analyze how uninformed agents acquire information over time from their bilateral trades. In particular, we show that uninformed agents can learn all the useful information in the long run and that the long-run allocation is Pareto efficient. We then explore how informed agents can exploit their informational advantage in the short run and provide sufficient conditions for the value of information to be positive. Finally, we provide a numerical analysis of the equilibrium trading dynamics and prices.

Suggested Citation

Golosov, Mikhail and Lorenzoni, Guido and Tsyvinski, Aleh and Tsyvinski, Aleh, Decentralized Trading with Private Information (November 2009). NBER Working Paper No. w15513, Available at SSRN: https://ssrn.com/abstract=1505836

Mikhail Golosov

Princeton University - Department of Economics ( email )

111 Fisher Hall
Princeton, NJ 08544-1021
United States

Guido Lorenzoni (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Aleh Tsyvinski

Yale University ( email )

493 College St
New Haven, CT CT 06520
United States

Yale University - Cowles Foundation ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-9163 (Phone)

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