66 Pages Posted: 4 May 2011 Last revised: 14 Feb 2013
Date Written: October 12, 2011
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: 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