Aggregation and design of information in asset markets with adverse selection

Vladimir Asriyan, William Fuchs and Brett Green

Journal of Economic Theory, 2021, vol. 191, issue C

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 social planner who observes trading behavior. 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 (search for similar items in EconPapers)
JEL-codes: D47 D53 D82 D83 G14 G18 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Aggregation and design of information in asset markets with adverse selection (2019)
Working Paper: Aggregation and Design of Information in Asset Markets with Adverse Selection (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:191:y:2021:i:c:s0022053120301174

DOI: 10.1016/j.jet.2020.105124

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