 Trading dynamics in decentralized markets with adverse selectionBraz Camargo (braz.camargo@fgv.br) and Benjamin Lester Journal of Economic Theory, 2014, vol. 153, issue C, 534-568 Abstract: We study a dynamic, decentralized lemons market with one-time entry and characterize its set of equilibria. Our framework offers a theory of how “frozen” markets suffering from adverse selection recover or “thaw” over time endogenously; given an initial fraction of lemons, our model delivers sharp predictions about the length of time it takes for the market to recover, and how prices and the composition of assets in the market behave over this horizon. We use our framework to analyze a form of government intervention introduced during the recent financial crisis in order to help unfreeze the market for asset-backed securities. We find that, depending on the fraction of lemons in the market, such an intervention can speed up or slow down market recovery. More generally, our analysis highlights that the success of an intervention in a lemons market depends on both its size and duration. Keywords: Adverse selection; Decentralized trade; Liquidity; Market freeze and recovery (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:153:y:2014:i:c:p:534-568 DOI: 10.1016/j.jet.2014.07.013 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
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