Aggregation and Design of Information in Asset Markets with Adverse Selection

William Fuchs, Brett Green and Vladimir Asriyan

No 979, Working Papers from Barcelona School of Economics

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 constrained social planner who observes trading behavior and chooses what information to reveal. We show that non-aggregating equilibria are always constrained inefficient. The optimal information policy Pareto improves upon laissez-faire outcomes by concealing favorable information in order to accelerate trade.

Keywords: adverse selection; transparency; information aggregation; information design; decentralized markets; optimal information policy (search for similar items in EconPapers)
JEL-codes: D47 D53 D82 D83 G14 G18 (search for similar items in EconPapers)
Date: 2017-07
New Economics Papers: this item is included in nep-des and nep-mic
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Related works:
Journal Article: Aggregation and design of information in asset markets with adverse selection (2021)
Working Paper: Aggregation and design of information in asset markets with adverse selection (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:979

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