Download This PaperSignaling in Competitive Search Equilibrium: Illiquidity vs. Partial Retention
23 Pages Posted: 29 May 2020 Last revised: 7 Jul 2021
Date Written: May 2020
Abstract
This paper develops a simple competitive search framework to study illiquidity and partial retention of assets as signals of asset quality in markets with private information. I find that both signals are used in equilibrium. However, among sellers with relatively high quality assets, those with higher-quality assets sell marginally fewer assets but with significantly lower probability. In comparison, among sellers with relatively low quality assets, those with higher-quality assets sell significantly fewer assets but with only marginally lower probability. Building on these results, I study aggregate liquidity and quality shocks. For sellers with high-quality assets, the shocks generate larger changes in trading probability than in trading volume, while the opposite happens to sellers with low-quality assets.
Keywords: Competitive search, Private information, Signaling, Retention
JEL Classification: D83, D82, D45, D86
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