Unobservable investments, trade efficiency and search frictions

Yujing Xu ()
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Yujing Xu: Shenzhen University [Shenzhen]

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Abstract: Information structure can affect market efficiency by influencing participants' investment incentives. In this case, the entrants' type distribution and the market trade efficiency are both affected by the information structure, so they are jointly determined and correlated. In order to investigate the effects of asymmetric information, this paper uses a random search model of ex ante investments and trade efficiency, assuming that the amount of investment remains the investor's private information. We show that the ex-ante payoffs are equivalent to the equilibrium payoffs when investments are observable. In the unique steady state equilibrium, non-degenerate investment distribution and price distribution emerge simultaneously with ex ante identical agents. The investments motivated by unobservability fail to improve social welfare due to the mismatches caused by unobservability. Allocating positive bargaining power to investors alleviates the mismatch problem and improves social welfare.

Keywords: Search Frictions Unobservable Investments Efficiency; Search Frictions; Unobservable Investments; Efficiency (search for similar items in EconPapers)
Date: 2022-05
Note: View the original document on HAL open archive server: https://audencia.hal.science/hal-03848827
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Published in Canadian Journal of Economics / Revue Canadienne d'Économique, 2022, 55 (2), pp.764-799. ⟨10.1111/caje.12595⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03848827

DOI: 10.1111/caje.12595

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