The Opportunity for Conspiracy in Asset Markets Organized with Dealer Intermediaries

Posted: 8 Dec 1999

See all articles by Timothy N. Cason

Timothy N. Cason

Purdue University - Krannert School of Management

Abstract

This paper reports an asset market experiment in which asymmetrically informed traders transact through competing dealers. Dealers face a classic adverse selection problem, because some traders have private information regarding the asset value while other traders are uninformed. When dealers can-not communicate outside the market, they price the asset competitively and the market is generally informationally efficient. When dealers communicate privately between periods, they collude successfully to widen spreads and increase profit. Another treatment permits traders to post limit orders, while still allowing dealers to communicate. Limit orders restore informational efficiency and narrow spreads, but cause dealers to earn negative trading profits.

JEL Classification: G12, G14

Suggested Citation

Cason, Timothy N., The Opportunity for Conspiracy in Asset Markets Organized with Dealer Intermediaries. Review of Financial Studies, Vol. 13, Issue 2. Available at SSRN: https://ssrn.com/abstract=197653

Timothy N. Cason (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
765-494-1737 (Phone)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
470
PlumX Metrics