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Government interventions in a dynamic market with adverse selection

William Fuchs and Andrzej Skrzypacz

Journal of Economic Theory, 2015, vol. 158, issue PA, 371-406

Abstract: We study government interventions in a dynamic market with asymmetric information. We show that restricting trading opportunities after an initial round of trade is always optimal. Under a sufficient condition it is optimal to subsidize trades only at time zero while imposing prohibitively high taxes afterwards. If interventions are required to generate a Pareto improvement over laissez-faire then trade is only restricted for a short amount of time. If additional sellers can arrive later, the optimal policy entails asset purchases and price controls. Subsidies can greatly enhance welfare but can be detrimental if provided with delay.

Keywords: Adverse selection; Market freeze; Optimal policy; Dynamics; Liquidity (search for similar items in EconPapers)
JEL-codes: D02 D82 D86 E58 E60 G01 (search for similar items in EconPapers)
Date: 2015
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Handle: RePEc:eee:jetheo:v:158:y:2015:i:pa:p:371-406