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Informational Cycles in Search Markets

Eeva Mauring

American Economic Journal: Microeconomics, 2020, vol. 12, issue 4, 170-92

Abstract: I show that market participants' equilibrium beliefs can create fluctuations in the volume of trading, even in a stationary environment. I study a sequential search model where buyers face an unknown distribution of offers. Each buyer learns about the distribution by observing whether a randomly chosen buyer traded yesterday. A cyclical equilibrium exists where the informational content of observing a trade fluctuates, which leads to fluctuations in the volume of trading. The cyclical equilibrium is more efficient than steady-state equilibria. The efficiency result holds also if buyers get a signal about past transaction prices or past trading volumes.

JEL-codes: D82 D83 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Informational Cycles in Search Markets (2017) Downloads
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DOI: 10.1257/mic.20180129

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