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Waiting for News in the Market for Lemons

66 Pages Posted: 4 May 2011 Last revised: 14 Feb 2013

Brendan Daley

Duke University - Fuqua School of Business

Brett S. Green

University of California, Berkeley - Haas School of Business

Date Written: October 12, 2011

Abstract

We study a dynamic setting in which stochastic information about the value of a privately-informed seller’s asset is gradually revealed to a market of buyers. We characterize the unique equilibrium in a continuous-time framework. The equilibrium involves periods of no trade or market failure. The no-trade period ends in one of two ways: either enough good news arrives restoring confidence and markets re-open, or bad news arrives making buyers more pessimistic forcing market capitulation i.e., a partial sell-off of low-value assets. Reservation values arise endogenously from the option to sell in the future. Our model encompasses both lemons and signaling environments - in a dynamic setting with sufficiently informative news, the two environments have the same equilibrium structure.

Keywords: Dynamic Games, Adverse Selection, Information Economics, Signaling

JEL Classification: C72, C73, D82, D83

Suggested Citation

Daley, Brendan and Green, Brett S., Waiting for News in the Market for Lemons (October 12, 2011). Econometrica, Vol. 80, No. 4 (July, 2012), 1433–1504.. Available at SSRN: https://ssrn.com/abstract=1830234 or http://dx.doi.org/10.2139/ssrn.1830234

Brendan Daley

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Brett S. Green (Contact Author)

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

2220 Piedmont Avenue
Berkeley, CA ca 94720
United States
5105759980 (Phone)

HOME PAGE: http://faculty.haas.berkeley.edu/bgreen/

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