Adverse selection and search congestion in over-the-counter markets

Taneli Mäkinen and Francesco Palazzo

Journal of Monetary Economics, 2024, vol. 146, issue C

Abstract: Asymmetric information about both private valuations of assets and their quality gives rise to uncertainty over sellers’ motives of trade, allowing high-valuation holders of low-quality assets to engage in speculative trades that involve no allocative gains. When sellers compete to find buyers, such speculative behaviour not only dilutes the average quality of assets but also creates a welfare-detrimental congestion externality that lengthens the time on market for each individual seller. A market designer can mitigate the inefficiencies by imposing a transaction tax and, in the case of severe adverse selection, limiting market participation.

Keywords: Asymmetric information; Search markets; Market design (search for similar items in EconPapers)
JEL-codes: D82 D83 G14 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304393224000308
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:146:y:2024:i:c:s0304393224000308

DOI: 10.1016/j.jmoneco.2024.103577

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().