Information Percolation in Segmented Markets

109 Pages Posted: 9 Mar 2010 Last revised: 10 Jul 2013

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Gustavo Manso

University of California, Berkeley - Haas School of Business

Semyon Malamud

Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: July 8, 2013

Abstract

We study equilibria of dynamic over-the-counter markets in which agents are distinguished by their preferences and information. Over time, agents are privately informed by bids and o ffers. Investors diff er with respect to information quality, including initial information precision, and also in terms of market\connectivity," the expected frequency of their bilateral trading opportunities. We characterize endogenous information acquisition and show how learning externalities aff ect information gathering incentives. More liquid" markets lead to higher equilibrium information acquisition when the gains from trade and market duration are sufficiently large. On the other hand, for a small market duration, the opposite may occur if agents vary sufficiently in terms of their market connectivity.

Keywords: Search, Matching, Double Auctions, Segmented Markets, Equilibrium, Information, Percolation

JEL Classification: C78, C73, C62, D44

Suggested Citation

Duffie, James Darrell and Manso, Gustavo and Malamud, Semyon, Information Percolation in Segmented Markets (July 8, 2013). Swiss Finance Institute Research Paper No. 10-09. Available at SSRN: https://ssrn.com/abstract=1566964 or http://dx.doi.org/10.2139/ssrn.1566964

James Darrell Duffie

Stanford University - Graduate School of Business ( email )

655 Knight Way
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gustavo Manso

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Semyon Malamud (Contact Author)

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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