Aggregation and Design of Information in Asset Markets with Adverse Selection

55 Pages Posted: 27 Apr 2017 Last revised: 4 Sep 2019

See all articles by Vladimir Asriyan

Vladimir Asriyan

CREI; Barcelona GSE; Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR)

William Fuchs

University of Texas at Austin - Department of Finance; Universidad Carlos III de Madrid - Department of Economics

Brett S. Green

Washington University in St. Louis - John M. Olin Business School

Date Written: September 2, 2019

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. In any equilibrium, each seller’s trading behavior provides an informative and conditionally independent signal about the aggregate state. We ask whether the state is revealed as the number of informed traders grows large. Surprisingly, the answer is no; we provide conditions under which information aggregation necessarily fails. In another region of the parameter space, aggregating and non-aggregating equilibria coexist. We solve for the optimal information policy of a constrained social planner who observes trading behavior and chooses what information to reveal. We show that non-aggregating equilibria are always constrained inefficient. The optimal information policy Pareto improves upon the laissez-faire outcome by concealing information about trading volume when it is sufficiently high.

Keywords: Information Aggregation; Information Design; Decentralized Markets; Adverse Selection; Optimal Information Policy; Transparency

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

Suggested Citation

Asriyan, Vladimir and Fuchs, William Martin and Green, Brett S., Aggregation and Design of Information in Asset Markets with Adverse Selection (September 2, 2019). Available at SSRN: https://ssrn.com/abstract=2959043 or http://dx.doi.org/10.2139/ssrn.2959043

Vladimir Asriyan (Contact Author)

CREI ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

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

Barcelona GSE ( email )

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

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

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

William Martin Fuchs

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain

Brett S. Green

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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