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Information Aggregation in Dynamic Markets with Adverse Selection

43 Pages Posted: 27 Apr 2017 Last revised: 23 Sep 2017

Vladimir Asriyan

CREI; Universitat Pompeu Fabra; Barcelona GSE

William Fuchs

UT Austin ; UC3M

Brett S. Green

University of California, Berkeley - Haas School of Business

Date Written: September 22, 2017

Abstract

How effectively does a decentralized marketplace aggregate information that is dispersed throughout the economy? We study this question in a dynamic setting where sellers have private information that is correlated with an unobservable aggregate state. We first characterize equilibria with an arbitrary finite number of informed traders. A common feature is that each seller's trading behavior provides an informative and conditionally independent signal about the aggregate state. We then ask whether the state is revealed as the number of informed traders goes to infinity. Perhaps surprisingly, the answer is no; we provide generic conditions under which information aggregation necessarily fails. In another region of the parameter space, aggregating and non-aggregating equilibria can coexist. We then explore the implications for policies meant to enhance information dissemination in markets. We argue that reporting lags ensure information aggregation while a partially revealing information policy can increase trading surplus.

Keywords: Information Aggregation, Decentralized Markets, Adverse Selection, Information Design

JEL Classification: G14, G18, D47, D53, D82, D83

Suggested Citation

Asriyan, Vladimir and Fuchs, William and Green, Brett S., Information Aggregation in Dynamic Markets with Adverse Selection (September 22, 2017). Available at SSRN: https://ssrn.com/abstract=2959043

Vladimir Asriyan (Contact Author)

CREI ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

HOME PAGE: http://crei.cat/people/asriyan/welcome.html

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

HOME PAGE: http://www.econ.upf.edu/en/people/onefaculty.php?id=p7040

Barcelona GSE ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

HOME PAGE: http://www.barcelonagse.eu/Faculty.php?id=510

William Martin Fuchs

UT Austin ( email )

Red McCombs School of Business
Austin, TX 78712
United States

UC3M ( email )

Calle Madrid 126
Getafe, 28903
Spain

Brett S. Green

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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